25 Jun 2014
Dairy Market BlogDairy
26th June 2014
European dairy prices firming
The relative lull in production created by the end of the European peak and the end of the Oceanian season, the weakness of the Euro against the US$ helping the competitiveness of our exports and the return of some buyers now that prices have eased are the main reasons why European dairy prices have been firming in recent weeks.
While milk availability is up 5.8% for the first quarter, year or year, it is seasonally down after peak (the European peak is April/May to our May/June).
Butter markets are tightening with lower milk availability, and with cream prices stable at around €4,100/t – supported by strong cream and ice cream consumption in generally warm weather around Europe. EU butter prices have increased in the last couple of weeks, reflecting higher world trade prices, and are around €3,500/t.
Powder prices are also firm at around €2,900 for food grade SMP and €3,200-€3,300/t for WMP, reflecting export demand, aided by a weaker Euro against the US$. These are considerably lower prices than only a couple of months ago, but this has made those products more competitive on export – even if quantities exported out of Europe at the moment are relatively modest.
Traders expect current whey powder price levels of €950 to 990/t to be sustained. Cheese has lost out to powder manufacture in recent weeks and lower availability is resulting in prices of Emmental, Mozzarella and Edam in particular firming slightly. Cheddar cheese markets in the UK, where the peak has also passed and spot prices have increased to 33-34 pence per litre (equivalent to 41 to 42€cents per litre), are stable at around £3,000 to £3,150/t for mild Cheddar (€3,750 to €3,900).
Speaking of spot milk prices, which are an interesting indicator of internal market trends in Europe, the Dutch and Italian prices reported through the EU Milk Market Observatory clearly show that the supply/demand imbalance is easing, with price levels increasing quite significantly from their bottom in April. Spot milk is “surplus” milk, for which there is no ready processing capacity or market, and it will therefore find the bottom of the market quickly.
As per the two graphs below, the most recent available spot prices reached €39.5/100 kgs (40.7c/l) in Italy, and €38/100 kgs (39c/l) in the Netherlands on 8th and 22nd June respectively. These are very significant increases and clear reversals of trends, and would confirm a view that dairy markets have bottomed out.
Supplies still strong
Supplies remain buoyant from most producing regions, with the US seeing more modest growth than most.
US production for Jan-May was up 1.6%, and by only 1.4% for May itself.
New Zealand supplies, while now at the end of the 13/14 season, finished very strong, with production for April up a whopping 32.8%! Overall, the full season 13/14 is expected to yield a 6.4% increase over 12/13. Australia too is having a good end of season, with April supplies up 5.6%, though a combination of heat waves and floods earlier in the season have resulted in supplies for the campaign todate down 0.9%.
The EU remains the largest producing region, and supplies there have grown spectacularly, by 5.8% year or year for the first quarter. Within that, the UK, France. Poland, Germany and the Netherlands are experiencing particularly strong growth (see map).
Outside of those regions, it is worth mentioning Argentina, another exporting region, where production is going backwards for the second year in a row, due to difficult weather conditions.
The graphics below, courtesy of IDB and IFA, give the supply situation, not just in %, but also in ‘000s of tonnes, for the most recently available period.
GDT – trend turn-around
The second GDT auction for the month, on 17th June, broke with the trend of the previous 8 auctions by scoring a positive price move of 0.9%. More interesting is the fact that the auction reflected lower availability, and that those products which trade in significant quantities (WMP and butter, among others) showed strong price improvements (see graphic below). Even SMP prices remained relatively stable, at -0.2%. Only AMF (butteroil) dropped in price significantly, by 3.8%.
El Nino over the Pacific?
All analysts are mentioning the likelihood of El Nino events over the Pacific in coming months, and all expect those to cause unfavourable weather conditions for milk production in Australia (drought), India, and possibly also New Zealand. Watch this space!
Outlook? The Rabobank view (Rabobank Dairy Quarterly Q2 2014)
Many analysts report that buyers who had been put off by high prices earlier this year – especially in Africa – are now back around the table.
The Q2 Rabobank quarterly report believes that China, after accumulating excess stocks in a buying frenzy, has stayed away from markets for the last couple of months due to improved local milk production.
Rabobank further expect that current global dairy market prices have fallen to levels which, once they translate into equivalent producer prices, are not sustainable. Therefore, they predict slower production growth in the second half of the year, and a recovery in dairy prices. They expect consumption in export regions to improve slowly as incomes rise, employment grows and retail prices fall.
Rabobank says this process will be progressive through 2014 as surplus stocks accumulated on the back of the strong early 2014 supplies are consumed, and they expect dairy product prices to recover significantly from late 14.
Rabobank too point to El Nino, suggesting that it could cause droughts in SE Australia, and excess rains in Argentina. Depending on the outturn, they say, this could hasten the rebalancing of supplies by limiting output in those two exporting regions.
On a regional basis, Rabobank predict the following:
EU – after the massive increase in production in 2014, where many farmers ignored quotas because of strong margins, they expect growth to continue to outpace domestic demand, but expect exportable surpluses to slow considerably.
US – wholesale prices in the US have not fallen as much as global prices. They predict US prices will now fall faster as supplies rise and exports fall back.
NZ – they expect a continuation of strong supplies (with the rider of the possible El Nino effect above), so that Q3 exports would be strengthened by higher levels of supplies than in the seasonal trough of 2013.
Australia – Positive outlook for all regions for 14/15, while lower prices are expected, they don’t expect those to fall so low that they would affect farmers’ ability to invest.
Brazil – it’s not all about the World Cup. Production has been stronger since the December peak than usual, and Brazil is not expected to be looking for much imports in the second half of the year – on the contrary, they could be active on the export market.
Argentina – Continued fall versus previous year predicted. Margins over feed costs remain positive, but other costs are mounting. Also, real expectation of continued unfavourable weather (excess rain) linked to the El Nino Event.
CL/IFA/26th June, 2014