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09 May 2014

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DAIRY MARKET BLOG – 30th APRIL 2014

Producer milk prices start to ease in Europe

Producer milk prices had reached, by Feb 14, a historical peak even higher than in Jan 2008 (see graph below).

EU milk price feb

However, with markets weakening globally in response to significantly increased milk supplies and slower demand (buyers buying short as they expect lower prices, stocks replenished and short term needs covered), milk prices paid to farmers are now starting to come under pressure in the EU – albeit to different degrees.

On the one hand, relatively limited price reductions are being flagged by milk purchasers in the main European member states.

On the other hand, it seems that countries in the zone of influence of Russia (especially Lithuania and Latvia) are looking at very significant price cuts in the coming few months.

European milk purchasers tend to announce milk prices in advance, unlike Ireland where the milk is priced and paid for in retrospect.

Milk price reductions have been announced by a number of milk purchasers in Europe as follows:

  • UK: Main UK retailers with direct producer contracts have increased their milk prices slightly (these are formula based with a Promar costing for Tesco). On the other hand, Arla Foods announced it is reducing its global on-account milk price by €1.5 cents, from 28 April 2014. This reduces Arla’s standard litre price in the UK by 1.27ppl taking it to 33.74 ppl” (41c/l approx)
  • Note: this price cut affects all Arla milk purchases in Denmark, Sweden, Finland, Germany, Netherlands
  • Latvia:milk price decreasing 2.5 cents per kg in April and for May price is 5 cents less. Blamed on Russia.
  • Austria: 0,5 €cent cut by some collectors/processors
  • Lithuania: Dairies have declared intention to decrease milk price by up to 30 % (11-12 euroct/kg), because of “recent negative market developments”
  • Slovenia: “Dairies suggested to lower the price 0,5 cent in may”
  • Belgium: “decrease of 0.3 c/l of average price for March (41.35 instead of 41.62 for february) and we are expecting a decrease of a few cents (10 % ?) in the next months.
  • Spain: “forecast prices says they are decreasing around 7-8%,between 0,025  a  0,030 euros/litre”
  • Netherlands: “Friesland Campina guaranteed price to fall by 0.5c/kg from March”

 

Outside of Europe

In New Zealand the weaker dairy commodity prices is being blamed for the weakness of the NZ$ and NZ banks are forecasting a small decrease in the 2013/14 Fonterra payout of NS$ 8.65/kg – of possibly around 0.2 NZ cents.

In the US, milk prices are historically high also, 20.5% higher in March 14 than in March 13. The outlook for the US milk price remains relatively good, though their increased exposure to a weaker global market is sure to reduce those too over the coming months. Forecasts by USDA and US universities suggest some easing in all class prices during 2014.

The feed cost to milk price ratio has improved significantly, however, so that while milk prices may decrease somewhat, margins over feed costs had actually improved by 6.5% in the last year (Feb 14 v Feb 13).

Medium/longer term outlook remains very positive

While global demand is temporarily dampened by expectation of lower prices and building over-supply relative to need, the long term outlook for dairy demand remains strong.

China remains a crucial factor

Chinese imports are expected to remain a very significant factor in sustaining markets and prices above historical averages for the medium to longer term.

In recent weeks, the full tariff free NZ quota has been filled, and the spring has brought about seasonally higher domestic supplies, helping to fill short term needs and some stocks. This has meant that import demand from China has slow down seasonally.

However, consumption of dairy products continues to rise rapidly in China, boosted by school milk schemes and other government policies, a partial reversal of the 1-child policy and increased affluence. The Chinese urbanisation is also driving deeper distribution networks which make it easier to get products to consumers.

Current forecasts are for Chinese demand to grow by a whopping 8.2% per year between 2012 and 2017, but most of that would be satisfied by imports as domestic supplies over the same period would only grow by 1.2% per annum. Experts estimate that China has a shortfall of 900,000t of dairy product per annum, which it relies on imports to fulfil – and this is expected to help firm up prices in the medium term.

Some traders are arguing that dairy commodity prices will consolidate around the current lower levels over the coming months, with some even saying they may recover in the run up to 2015.

Imports from China and Russia in particular have continued to increase (very significantly, in the case of China) into 2014, as shown by the graphs below (Jan-Feb 14 compared with Jan-Feb 13).

dairy imports jan-feb 2014

Futures markets suggest dairy markets may stabilise

Futures market prices do not reflect the price at which product is currently being traded, but the price at a future point in time which traders and speculators expect it to be traded at. Therefore the info should be taken with a pinch of salt. However, it appears that butter and powder futures may stabilise around current or slightly below current level, over the coming months.

Eurex and NZX suggest butter prices are expected by traders and speculators to stabilise at around current lower levels. CME in the US is actually suggesting strong butter prices (they are mostly not export dependent).

Powders – CME is coming down for WMP from very high levels, and though slightly down remains above 2008 records. SMP Eurex is flatlining around €2,900/t – slightly below current average market prices.

Cheddar cheese – US CME is at historically high levels.

Russian uncertainty

Russia was the main factor mentioned by Lithuanian and Latvian farmer representatives in being responsible for early and significant milk price reductions. This is because of the reliance of both those countries on the Russian market, and reports that demand has been slowed down in the context of the Ukrainian crisis.

The same Ukrainian crisis could also have a negative impact on feed ingredients prices.

 

CL/IFA/28th April 2014

 

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