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15 Jul 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Global milk flows fall, underpinning price recovery

We have already documented the fact that the EU production trends, especially in May and June, were either for slowing growth (Netherlands, Poland, Denmark) or for out and out reductions (France, Germany, UK, Spain) – see more details on this below.

But we now see that most of our international competitors are also pulling back, in some cases quite dramatically.

According to NZ Farmers, Kiwi June milk supplies were down 10%.  May output had increased by 3.5%, finishing the 15/16 season on a stronger note, though the whole year closed 1.6% down on the previous season.  Whatever factors allowed for strong growth in May were well and truly gone in  June, the first month of the new season.  Supplies in the South Island fell by a massive 22%, with the North Island output declining 6%. The forecast for the full year 16/17 output remains at -3%.

Another positive supply-side piece of news from New Zealand is that Fonterra is reporting that their stocks are down 11% on the same period last year.

In the US, latest USDA/WASDE forecast for 2016 is that production will increase by a total of 1.8 % – revised downwards from 1.9% a month earlier.

According to Quarterra Consulting and Advisory, a Buenos Aires based consultancy firm, In South America, poor weather and low milk prices have also led to major production decreases.   Argentina and Uruguay experienced torrential rain in April, causing infrastructural failure so that milk tankers could not reach farms and collect milk in some cases.  This was compounded by unseasonally low temperatures.

In Argentina, Jan-May milk production was down 11.9%, it was down 12.5% in Uruguay for the same period, while Brazilian output was down 4.5% for the Jan-Mar period.  All three countries are relatively significant milk producers and exporters. Due to poor economic conditions in Brazil, a big customer for its neighbour’s dairy products, payment defaults have been reported.

EU supplies easing in recent weeks, even without EU production control measures

Poor prices over a longer period than was ever sustainable, a cool spring, and major increases in cow culls, all combined to see a dramatic change of trend in EU supplies over the last couple of months especially.

In some EU member states, production is falling:

 

– In France, for the period from April to June 19th, output was down 1.62%.  For the month of April itself, it was –1.1%, with the fall speeding up for May to –3.2%, and again for the week ending June 19th to -3.27%

– In Spain, production for the  year to end May was down 3.7%, with May itself  –1.3%
– Supplies in the UK are practically collapsing: while the year to the end of May  was 1.2% easier, the month of May itself was down  7.8%, while the 2 weeks ending 02/07 were down a whopping 9.2%

Germany, for the week ended 26th June, was down 1.9%, a steepening rate of decrease over the last number of weeks (see graph below for German weekly milk deliveries for the year to 26th June).

German milk production

Source: ZMB

In other EU member states, production continues to grow, but at a slower pace:

 

– The Netherlands have been the most dynamic EU milk producer.  Supplies for the month of  April  were up 10.8%, slowing down in May to a still significant +8.3%
Polish milk production also grew strongly for the year to end May, by +6.7%, but for May itself growth has eased to +2.1%

-For Denmark, output for  March was +8.9%, slowing rapidly in April to +1.9%, and moving into negative territory in May, at  –0.2%

-Finally, for us in Ireland, March production was +28.6%, April was –4.1%, with improved weather in May leading to an increase much more moderate than in the first quarter, at +4.9%

 

The graph below outlines the milk deliveries in the EU 28 to May 2016, as estimated by ZMB, and clearly show much more overall modest growth of 1.1% for May compared to 3.9% for the first 5 months.

EU 28 milk production

Source: ZMB

Ornua PPI stabilises

The Ornua PPI for dairy products traded in June 2016 was stable at the same level as May – 81 points.  This, according to Ornua, is equivalent to a farmgate milk price of 21.39c/l + VAT or 22.5 c/l incl. VAT.  This is lower than the average EU dairy market returns, in particular because Irish butter and SMP prices are somewhat lower than EU averages.

Ornua PPI June 16

Source: Ornua

EU and global dairy prices in recovery

EU dairy product prices have increased steadily for the last 9 weeks, increasing by nearly 20% for butter, 5% for SMP, 13% for WMO, 4% for Cheddar and 16% for whey powder.
The upshot of those increases over that period is that the gross returns for dairy products, assuming a relatively representative Irish product mix including all the products in the graph,  have risen by 3.5c/l to 28.6c/l.  Deducting 5c/l processing costs and adding 5.2% VAT would leave a farm gate milk price of around 23.6c/l +VAT or 24.83c/l incl VAT.  Assuming a continuation of this trend, co-ops should be able to recoup some of the supports they have  given farmers in recent months, and should be in a position over the coming months to entertain milk price improvements.

EU average dairy commodity prices

Based on: EU MMO data

EU dairy commodity price increases

Based on: EU MMO data

On the world market, commodity prices have also been firming in recent weeks, as shown in the graphs below.

SMP recovery has been modest so far, as this has been the most problematic product both in the EU and internationally over the last couple of years.

However, WMP, butter and Cheddar prices in the US and Oceania have started a much more decisive recovery.  Milk volumes are going down globally, and we are starting to see the beginnings of a pickup in demand as buyers fill their needs for the end of 2016 and the first quarter of 2017 with the fear of shortages and/or rising prices in the back of their minds.  There are reports of buyers attempting to lock in volumes for lengthy periods of time at current prices, but lower volumes should help sellers negotiate more bullishly.

global SMP prices

global wmp prices

global butter prices

global cheddar prices

Source: EU MMO

The analysis by CLAL presented below, shows that, since the recent low of 15th March, GDT average prices for all products have increased 7%, Anhydrous Milk Fat (AMF or butteroil) by 20%, SMP by 12% and WMP by 4.6%.
SMP prices have been inching up with every one of the last 3 GDT auctions.

clal GDT

Source: CLAL

What impact from Brexit?brexit

The most immediate impact of the referendum results for Brexit was a sudden weakening of Sterling against the Euro, from €1 = 76p to €1 = 83p – a 9% move overnight.  Sterling then got quite a bit weaker (86-87p to €1), then strengthened again as some level of political stability was seen to be returning to the UK with a new PM.

Export companies routinely hedge for currency fluctuations, at least for the short to medium term. Those levels of exchange rate are within the ranges that have been experienced in the last 5 to 10 years.  Hence, the immediate impact on trade is likely to be negligible.

Longer term, some international banks have expect Sterling to remain weaker, possibly at €1 = 90p + in the case of a “disorderly” exit negotiation.

More worrying, perhaps, is the impact the new situation is having on financial and stock markets, and what that does to investment and funds – including pension funds – and potentially to the UK (and the Euro?) economy.

There is a huge amount of speculation, and the truth is that no-one knows quite how everything will pan out.

So, here are a few definite facts about Brexit:

  • Exit negotiations can only start once the UK has “pressed the button” by invoking Article 50 of the Treaty. New PM Theresa May has suggested this may only happen early next year.
  • From that moment, the process can take 2 years or more.
  • Meanwhile, trading conditions remain exactly the same: no import tariffs, no custom control, etc.
  • Negotiations are between the UK and the EU as a block – not with individual member states. Concretely this means that special trading conditions cannot be negotiated bilaterally between the UK and Ireland, and Ireland will have to work hard to ensure its interests in this respect are taken on board in the block negotiations.
  • Similarly, the UK cannot go and negotiate trade deals with countries outside the EU until it is properly out of the EU – i.e. at least 2 years + down the road. Hence, in the short term, it will not be possible for the UK to agree with New Zealand, say, to import tariff free dairy or other products, and the relative competitive position of Ireland on the UK market with other EU exporters to the UK will be unchanged.
  • Until exit negotiations are completed, the UK continues to make its contribution to the EU budget (including CAP).
  • Even after exit, until 2020, the CAP funds (including all direct payments) are guaranteed by the CAP regulations. Those cannot be changed readily, except through a lengthy process involving agreement by the EU Commission, the EU Council, and the EU Parliament.

While Ireland has reduced its dependency on the UK market for its trade in food, it remains our top trading partner.  It is also a fact that Ireland is more reliant on the UK as a trading partner for food than any other EU member state, as is clear from the graph below – with just under 45% of our agri-food exports going to the UK, Cyprus with 20% the next most dependent, and no other member state with more than 10% reliance.

share of agrifood to UK

Source: Agra Europe

When it comes to dairy, the UK is also a very important customer, especially for Cheddar and other cheeses and for butter.

Irish trade with UK

It is therefore essential that our Government would ensure, throughout the exit negotiations, that the EU negotiators take on board the importance of the UK to Ireland’s agri-food industry and its economy.

 

CL/IFA/15th July 2016Cow

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