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24 Jun 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Milk flows slow, and markets firm – but what of the impacts of Brexit and the EU debate on production management?

In all dairy regions bar the US, milk flows have been slowing, or even reducing in recent weeks.   As increasing evidence of this is becoming public, market sentiment has been changing, with buyers now actually worried about possible shortages before year end.  And the impact has been that the prices of most dairy commodities at global and EU level have been firming for several weeks.  There is a way to go, however, before this translates into higher farm gate prices, and farmers all over Europe, New Zealand, Australia and elsewhere continue to struggle with milk prices well below production costs.  Of course, this is playing the major part in the increased cow culls and output moderation we have been seeing in recent months.

As I write, confirmation is coming through that the UK electorate have voted to leave the EU.  The first definite impact is a major fall in the value of Sterling which will be damaging to Irish exports if it persists, and significant falls on international stock markets.  So, what will be the longer term impact of our most important export market exiting the EU?

Many European farmers have been suffering from negative profitability for over a year, and in many member states, this continues to affect views on dairy policy when it comes to the desirability to provide for Europe-wide, and EU-funded, potentially compulsory production management.  Even the fact that production has started to moderate in the absence of any EU measures doesn’t seem to dampen that debate – at least for now.  It will feature heavily in the June and July meetings of the EU Council of Agriculture Ministers, with demands for further support packages.

The logic of the argument is problematic (see my detailed article on the topic here: https://www.ifa.ie/article-222-and-the-flawed-logic-of-production-management/#.V21ZoaJ-3Ps ) but the levels of financial pressure on farms and the political pressure on governments and farm organisations, especially in Italy, Spain, France, Poland and Austria is such that finger pointing at expanding countries is influencing those debates irrationally.

EU production easing in April/May

All indications from the main EU dairy producing countries are that low profitability and weather have combined to slow or reduce milk output.  Cow culls were up 9.1% for February according to Eurostat, with countries like Germany, France, Ireland and the UK all recording increased slaughters right up to date.  Though those statistics are not segregated between dairy and beef cows, they are nonetheless understood to be mainly attributable to decisions by dairy farmers to reduce numbers and feed costs and/or remove poorer performing animals.

EU milk production

 

Source: EU MMO

Milk production in the month of April fell by 1.1% in France and Spain, by 3.4% in the UK and by 4.15% in Ireland (though this also reflects some milk carried forwards from March 15 into April 15).

More recently, production in Germany has also started slowing: week 23 saw output down 1.7% on the same week in 2015, and 1.1% down on the previous week.  April milk collections in France were down 1.1% with faster decreases into May/June.  Week 24 saw a 2.5% decrease relative to the 5 year average, and 2.3% decrease relative to the same week last year.

french milk output

Source: France Agrimer

Even in the Netherlands, where production does continue to grow, the May figures have slowed to an increase of 8.8% from an April figure of + 10.8% – however, this is still a significant amount of additional milk, and one of the highest May figure ever produced in the Netherlands.

Global output easing, except in the US

With the new season just starting in New Zealand, May saw a small recovery in supplies, but still the season will be about 1.5 to 2% lower than previous year, with a forecast for 16/17 of a further 3% decrease.  Cow culls there are also on the up, as farmers seek to reduce feeding costs.

Australian production has also been decreasing for the last few months, and will finish the season 1% down, with a  forecast of another 1% fall for 2016/17.

The exception to this trend has been the US, where output for the year to end April was up 1.9%, and the USDA forecast for the full year 2016 is for an increase of 1.9%, while their 2017 forecast is for a further 1.26% increase.  In the last year or so, strong increases in domestic demand, especially for butter, have restricted the US involvement on world markets.

EU dairy product prices continue to firm

The average dairy commodity prices reported weekly in the EU MMO show continued firming for the last 6 to 7 weeks.

During that period, butter prices rose by €310/t, SMP and Cheddar by €70/t, WMP by €220/t and whey powder by €80/t.  Those product prices, based on a relatively representative Irish product mix, would, on the basis of the 19th June prices, return 28.07 c/l gross (before processing costs) – allowing for 5c/l processing costs and adding VAT, this would be equivalent to a milk price of just over 24c/l incl VAT.  This is just over 1c/l increase compared to the week previous figures (12th June).

EU dairy prices

Based on EU MMO data

Brexit – what of it?Brexit

The vote was always going to be close, but this morning the result came: 52% of UK voters chose to exit the EU.

IFA Senior Economist Rowena Dwyer makes the following basic points which are important to realise:

  • The UK remains part of the EU for at least 2 years, as per EU Treaty.
  • Full and open market between Ireland and the UK, the UK and EU, remains – no tariffs, no border checks, no change to EU budget.
  • The UK will now formally notify the EU and commence negotiations – this could happen at the EU Council meeting next week.

For Irish farming and agrifood, Rowena stresses that the main short term issue is the exchange rate effect, which will impact on the value of exports to the UK, and therefore creates concern on the price of agricultural produce – and IFA will strongly argue that processors and purchasers cannot be allowed to take advantage of this short term uncertainty.

This morning, the exc hange rate fell to around 80p for €1 – from about 76p for €1 a month ago.  This is 5% weaker and could make a difference of €120 per tonne on a cheddar cheese price of £1825/t – that’s equivalent to around 1.6c/l.

Exch rate sterling

Ireland produces approximately 215,000t of cheese (2014), mostly Cheddar, and exports upwards of 88,000t (2015) to the UK annually. The UK is our most important food export market.

Logically, with a disimproved exchange rate against the Euro, Rabobank have warned in a briefing note today that the Brexit would result in higher food prices in the UK.   This can be found at the following link: https://far.rabobank.com/en/sectors/regional-food-agri/Brexit-likely-to-inflate-UK-food-prices.html

However, the truth is that most of the ultimate impact is totally unknown, as it will depend on the conditions to be negotiated over the next 2 years by the UK with the EU, and how markets actually adapt to the new reality.

Returning to Rowena Dwyer’s briefing note, it is important to understand that Ireland would not be able to negotiate its own trade agreement with the UK – this can only happen between the UK and the EU, of which Ireland is only 1 of 27 partners.  In terms of what will be important in those negotiations for Ireland, Rowena has identified the following areas which our Government will need to focus on:

  • Minimisation of any barrier to trade (tariffs, free movement, especially between ROI and NI)
  • Early agreement and certainty on the EU and CAP Budget up to 2020 – special attention needed for cross-border farms
  • Tax rules for purchases of inputs from UK (e.g. VAT)
  • Animal health standards (maintain comparable standards)
  • Guard against changes to labelling rules which could hamper trade between EU and UK.

Production management debate continues in EU

The French, Polish and German Ministers for Agriculture will table a paper at next Monday’s EU Agri-Council which will make a variety of constructive suggestions for improved supports, but worryingly also suggests that mandatory production management measures may need to be considered, and that certain aids could be linked to production reductions.

The issue is very fraught, motivated by genuine frustrations with unviable dairy incomes.  However what EU dairy farmers need are tools and instruments which equip them to deal with this and further periods of negative volatility.  Reducing production every time the cycle turns down is not a viable strategy for the future of the sector – and even for 2016, there is no evidence that it would speed up the rebalancing of markets which has already begun.

Watch this space, as this issue will continue to run at least until farmgate milk prices start recovering – and this could happen during 2016.

 

 

CL/IFA –  24th June, 2016Cow

 

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