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04 Mar 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Some good news at last – but how significant?

In the last two weeks, we have seen some badly needed positive developments on global dairy markets.

China’s back!

First, we heard through GTIS that imports of dairy products into China had increased by an overall 51% in volume, and 25% in value in January 2016 compared to January 2015. The massive import volume increases affected all products, with butter up 83% albeit on relatively low volume, but WMP up 52.3% to over 120,000t. Even infant formula imports, which had held up very well in the last two year had risen 38.9% to 17,000t. SMP imports were up a very impressive 43.2% to 33,500t and whey powder a massive 53.2% to 44,000t. From low levels, cheese imports were reported up almost 66% to nearly 10,000t. Value increases were slightly less, reflecting reduced unit prices, but were impressive nonetheless.   See table below.

China

Source: Clal based on GTIS

It is not unreasonable to think we may be seeing the first signs that the most important global buyer is back on the market. After all, they must by now have worked their way through much of the stocks acquired in the buying spree of 2013-14, and their domestic production, while increased from that period, still lags behind domestic demand with challenges around matching the exit of small producers with the coming into production of larger units.

We must be careful of not overstating the case: January is always the month in which the greatest volumes are traded with China, and this is linked to the New Zealand trade deal quotas. Apart from UHT milk, the bulk of the other products are bought from New Zealand, and it is understood that their entire 2016 reduced tariff quota for all dairy products imported into China has now been filled.

While this may dampen down further imports, it may actually be that buying will continue from New Zealand and others at full tariff rates as the needs of domestic demand grow greater.

 

GDT’s first increase in 2016

A matter of days after the reports of Chinese import growth, GDT returned its first positive result for 2016. A modest overall 1.4% increase reflected a very strong performance from WMP, whose price climbed 5.5%, SMP at +1.3% was also positive, with very strong improvements for lactose and rennet casein, of which only small amounts are traded. On the other hand, AMF, an important butterfat product quantitatively in the auction, lost 8.5% from the previous week. The quantities traded were low, but roughly the same as this time last year, however, they were just over half of those traded in the same auction in 2014.

GDTSource: GDT

EU and NZ futures looking up?

It’s always dangerous to take too much comfort from today’s futures prices, as trends can change relatively quickly.

However, possibly in response to the GDT increase earlier this week, the European EEX futures market recorded some small up-trading trends for SMP.

The NZX futures market – which is trades a great deal more than the EEX – traded mostly WMP lots, and while price trends were mixed, there most lots showed price increases of $10-80/tonne.
The SMP lots traded were up a significant $180/t compared to the last trade around 16th February.

Supply/demand balance continues off kilter

While these are very positive signs, it still remains the case that global milk supply continues to outpace still sluggish demand.

The graph below shows that the main milk producing/exporting regions of the world, between them, produced an additional 4.5 m tonnes of raw milk (net gain bar on the extreme right).

global production

Source: Orrani Consulting

Despite the global dairy downturn, the loss of China, the EU/Russia trade ban, and lower oil revenues which would have affected Venezuelan demand dramatically, global trade actually increased somewhat, with lower prices helping affordability in new emerging markets.

But while total world imports as outlined in the table below increased by 0.2 m tonnes of raw milk equivalent, additional output was considerably greater, as outlined in the graph above. This has led to significant build-up of stocks, both institutional (intervention, APS, and US equivalents) and private.

trade balanceSource: Orrani Consulting

Europe a major contributor to global production increases, and within EU, Ireland

Looking more closely at where the additional milk production is coming from, the EU is clearly accounting for a substantial element of it.

Within the EU, it is a matter of fact that Ireland has accounted for the largest volume of additional milk at around 735,000t, ahead of the Netherlands which produced an extra 682,000t. As I stated in the last blog, there is a lot of emotional language, not all of it in EU circles either, about how “guilty” Europe, and within Europe, Ireland, are of the current overproduction situation, and by extension, of the current dairy crisis.

This unfortunate judgmental language is influencing what is a poor analysis by some at EU level of what is not just a problem of overproduction, but a problem of global supply/demand factors equally influenced by economic, weather and geopolitical factors.

EU output growth is only one factor in this, yet policy discussions in Brussels this month will consider EU-wide production management proposals coming from the French government in particular – but more about this on another forum.

It is useful to remind ourselves that while Ireland is one of the more progressive EU member states who have geared up in anticipation of the long announced end of milk quotas, it is also one of the smaller mid-tier producers, with larger countries like France, Germany, the Netherlands, Italy and the UK actually accounting for many times the same volume of milk (see graph below).

eu productionBased on EU MMO

Stock build up

Increased output over a prolonged period of time, and depressed demand have unsurprisingly led to the build up of stocks.

At EU level, SMP intervention stocks stand at around 95,000t with weekly intake of between 7,000 and 9,000t in the most recent weeks. The maximum level beyond which the EU Commission can bring in tendering is 109,000t.

public interventionSource: EU MMO

A further 14,000t of SMP went into both types of APS schemes in 2016, but total stocks by end January stood at just around 34,000t.

14,000t of butter when into APS in January 16, with 59,275 in stock at the end of the month.

No butter has gone into intervention, as current market prices exceed intervention equivalents by around €450/tonne.

EU prices

EU commodity prices have yet to reflect any potential uplift from the GDT outcome, bearing in mind that the latest EU MMO data available predates the auction, and that EU prices do not systematically follow GDT. At 26.44 c/l gross return, this is obviously a very low return. It should be noted that, at €1710/t, Irish reported SMP price for the 28th Feb 16 is above EU average, as is the butter price at €2790/t.

The equivalent gross return, allowing for the Irish butter and SMP prices, and the EU equivalent for the other products, would be marginally better at 27c/l.

EU RETURNSBased on EU MMO

So, while we are seeing some good developments at global level, we need to see more confirmed trend in demand improvement, and/or some reductions in global production volumes to start seeing a real pick up.

Most analysts do expect the market trends to start changing during 2016, but it is unclear to what extent and when they will start impacting farmers’ prices in 2016.

 

 

 

CL/IFA/4th March 2016

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