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02 Jun 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

First real signs of market recovery

The price increases at the last two GDT auctions and a persistent if modest firming in EU spot and average commodity prices, boosted by forecasts of lower production growth in most of the main regions bar the US, suggest that the worst of the long 2 year dairy slump is behind us.

The second extension of the intervention ceiling for SMP to 350,000t after the 218,000t first extended ceiling was reached on 24th May is a genuine help in keeping produce off the market.  While a continuation of the amounts sold in at the end of May would suggest the new ceiling could be full by mid-July, there is a real possibility that improving SMP prices at EU and global levels would slow down, if not stop, the inflow into intervention.

Just like when the ceiling was first extended, there was a lag between political decision and legislation.  As a result, a tender process has begun, with the first (and last) tender due to close on 7th June.  The EU commission has given strong signals that it would not expect prices to fall below the normal buying in price through this process, which is crucial.

The stock overhang is not a massive concern, as the EU Commission has a reasonable record of selling intervention stock prudently when markets recover, and at a profit.

SMP intervention

 

Source: EU MMO

Research by Louis Dreyfus, one of the world’s largest commodity trading companies, which was presented at an FCStone conference in Dublin this week, suggests that private (commercial) stocks around the world are being consumed and tightening, and expect a pickup in demand.

Price recovery will take time to translate back into improved milk prices however, as EU commodity quotes had fallen by 40% (butter) to 50% (SMP) since their 2014 peaks.

Also, many have commented that co-ops had supported milk prices, especially over the last year or so, and this would also affect the timing of likely farmgate milk price improvements.

It would be good, however, for farmers to be able to think that milk price cuts are now a thing of the past.  Didn’t Friesland Campina just announce they would hold their June milk price, and in a welcome bold move, announce they would increase the sales price of their cheeses as dairy commodity prices are currently loss making for both processor and farmer.

See more on this here: https://www.frieslandcampina.com/en/news/frieslandcampina-raises-sales-prices-cheese/

EU output slowing down into April

Bad weather has affected grass and fodder growth in the regions of NW Europe producing milk off grass, and this has relatively reduced output in those areas.  Current floods in the UK, Germany and France will also probably affect fodder production.

Negative margins have hit farmers in all EU member states, and further afield (see report on Australia’s milk prices in my previous blog).

When comparing output in some parts of Europe for April, however, we need to remember that the April 2015 figures with which they are being compared were skewed by a significant amount of milk being carried over from the last month of the quota regime to minimise superlevy bills.

For the moment, those trends are not yet apparent from EU MMO data, which tends to be about 2 months behind on EU milk production.  So, it may not have been fully factored in by all operators.

That said, higher cow culls in Germany and France, and significant production reductions in the UK in particular suggest that a slowdown in production is on the cards for quarter 3 and 4.

Speaking at an FCStone conference held in Dublin this week, a representative of Louis Dreyfus predicted output may even fall back, by as much as 1.6% over the second half of the year.

Another important consideration is that Oceania is now at its trough time, while Europe is just past peak.  There is some evidence that buyers’ uncertainty about availability of supplies for the third quarter is also playing a part in helping to firm prices a little.

Prices picking up

The last two GDT auctions saw a by now well established pattern of much reduced quantities offered and sold compared to the previous year – bearing in mind that those were lower than prior also.  Despite this, we cannot ignore that the signals sent by GDT are watched by all operators, buyers, sellers, analysts and commentators alike, whether or not they are actually involved in the auction.

So, the second May auction and the first June auction have seen a real pick up in prices, with an especially welcome double digit increase for SMP in the last auction.  WMP prices were among the few to fall by 1.7% this time – reflecting the doubling of tonnage to approx 11,000t relative to the previous auction.

GDT 1

GDT 2

 

Source: GDT

EU commodity prices have also been firming up in recent weeks, as is evident from the graph below.

While modest, and from very low levels, the price uplift is not insignificant, with just under 1c/l increase in gross returns from an Irish product mix to just over 26c/l (before processing costs and VAT).

EU dairy commodity prices

 

Based on EU MMO data

EU intervention and APS stocks update

The following is a short report on where intake and stocks are at in intervention  (SMP) and APS (SMP, butter and cheese) and what Ireland’s contribution to each has been.

Note, the figures from the EU MMO for stock are only to end April, and significant quantities of SMP have been sold into intervention during May.

  • Ireland sold 27,423t of SMP into intervention in total in 2016
  • Actual stock end April 152,394t (large quantities bought in in May do not appear yet) – Ireland accounted for 14,437t in stock at the same date
  • Unlike intervention, APS is transient stock, operator retains ownership and often has a market for the product when it goes into storage
  • Only 4,928t offered into the 210 day SMP scheme this year to end May – Ireland 0t
  • 17,731t offered into the 365 day SMP scheme to end May – Ireland 0t
  • 89,425t butter offered into APS – Ireland 772t
  • 46,630t Cheese – Ireland 3,438t
  • Stocks to end April (latest available data from EU MMO)
  • SMP APS (all schemes) 32,026t
  • Butter APS 78,295t
  • Cheese APS 34,182t
  • Note, any product put into storage during May/June does not appear yet in official stock figures.

A most interesting piece of research by AHDB Dairy

AHDB – the British equivalent of Teagasc – have published a very interesting piece of research in recent days, which ought to be taken into account in the sometimes simplistic debate regarding whether or not supply management is the answer to the dairy crisis.

The study contrasts the amount of additional milk produced by all EU 28 member states, with the amount of that milk that has actually ended up in market support measures such as intervention and APS.

Essentially, what it shows is that the three countries which grew production by most since the end of quotas, including Ireland, clearly planned for this and have sold considerably more of this extra milk on the market than into intervention.

The differences are stark:  While the biggest “over producers” – the Netherlands, Germany and Ireland, between them, have only 16% of their extra milk sitting in intervention or APS, Belgium is reliant on those schemes for 86% of its extra milk, and France for 68%.

The morale of the story is that it makes little enough sense to increase production just because you can when you don’t have a marketing plan to sell it sustainably.

AHDB

 

Source: AHDB Dairy – UK

Glanbia Co-op logo

GAP scheme for interest free cash flow loans launched by Glanbia Co-op

Earlier today, Glanbia Co-op has announced the creation of a €55 million Glanbia Advance Payment (GAP) Scheme that will offer interest free cashflow support to member suppliers in periods when milk and grain prices are weak.

To quote from the Glanbia press release:

“Participation in this voluntary scheme will allow members to draw down cashflow support from the GAP Scheme when the market prices for milk and grain fall below specific levels or “price triggers” set annually by the Board of the Co-op.  The interest free repayments to the GAP Scheme will be triggered when markets recover above specific levels.”

Further explanation of the method of funding this scheme from the Glanbia Co-op press release:

“The €55m Glanbia Advance Payment (GAP) Scheme is being funded by Glanbia Co-operative Society through the launch of an Equity-Linked Exchangeable Bond.  This is an innovative financial product that leverages the strength of Glanbia plc.  The Co-op will raise €100 million by issuing a five year Exchangeable Bond linked to a pledge of approximately 4.3 million Glanbia Plc shares.  The Co-op retains full ownership of the 4.3 million shares unless the exchange is exercised.”

The scheme is to be in place until 2020, and it is yet another innovative approach to support suppliers through price and income volatility which Glanbia must be complimented on.

It would be neat if this innovation could help Minister Michael Creed see the benefit from utilising the recently voted state aid concession allowing member states to support farmers’ cash flow and delivers on IFA’s proposal in this area for the benefit of farmers supplying all co-ops.

Also, I would hope that, just like the Milk Flex (another Glanbia innovation) encouraged banks to look at developing similar investment packages, the GAP will be seen as a real template for short term flexible cash flow lending by the banks.

 

 

CL/IFA/2nd June 2016Cow

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