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29 Jul 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Brexit and weakening oil revenues do not appear to dampen dairy price recovery

With milk flows crashing down in some regions, and slowing down in most others, demand issues (extended Russian ban, falling oil prices, Brexit uncertainty…) though very real concerns, appear to have had little impact on the ongoing recovery in dairy prices.

Output collapses in the UK, lifting spot and indicator prices

UK daily milk supplies have continued to fall dramatically against previous year since April – last year’s supplies were exceptionally high.  May supplies were down 4.8% compared to the previous year, and since June output has also fallen below the three year average.

For the first two weeks of July, UK milk supplies have fallen by a massive 10.2% compared to last year, and 6% below the three year average.

Cow slaughters in the UK for June were a whopping 19.5% up on last year, and 17.2% ahead of the three year average.  For the year to the end of June, cow slaughters were up 5.8% on the same period last year.

UK daily milk supplies

Source: AHDB

The upshot of this crash in milk volumes has been a massive increase in UK indicator and spot prices in the last two months.  The table below, by AHDB Dairy,  shows that between May 16 and July 16, their Actual Milk Price Equivalent (AMPE) has risen from 16.8 pence per litre to 23.4 pence per litre, and the Milk Cheese Value Equivalent (MCVE) from 16.6ppl to 23.5ppl.  But spot prices increased well ahead of that, from 14-16ppl to 25-29ppl.

spot uk milk price

First Milk announces further price increases for August and first milkSeptember

Also as a result of impending shortages, First Milk has announced price increases for August and September on both their A (1.25ppl) and B (5ppl) milk prices.  They had already increased prices in July, by 0.5ppl for A milk and 2ppl for B milk.  They have also indicated that there was potential for the prices to rise further into September.

Milk flows slowing or falling in EU

EU output for Jan to May is still growing but at a significantly slower pace of 4.5%.  More recent trends going into June and July in the more important milk producing member states show a further sharpening of that trend.

 

May milk supplies in France were down 1.7%, with week ending July 17th 1% down.  Output in Germany for the week ending 10th July was 2.2% back. We have already shown the UK experienced a real crash in output.

 

In other countries we’re seeing a consistent slow down since April/May.  Ireland, for starters, which had seen an increase in May output (revised by CSO) of 6.3%, saw an increase of only 4.5% for June.

 

In the Netherlands, June output was 4.8% down on the same month last year.  This is a significant slow down on May, which was over 8% higher than May 15, and April, over 10%. Polish milk output, up 6.7% for the year to the end of May, was losing steam in May at +2.1%.  Danish supply figures went from 8.9% uplift for March to 1.9% in April, and turning around to a fall of -0.2% for May.

 

EU forecasts for the full year 2016 are for no more than 1% increase in output.

EU cows' milk collected

Source: EU MMO

Increased cow slaughters underpinning slower EU production

 

EU-wide cow culls for the January to April period were up 5.8%, 12.5% up in April alone, with major increases in Denmark (+54.7%), the Netherlands (+48.4%), Poland (+31.3%) and Germany (+15.9%) (see table of EU cow slaughters below).  French May cow slaughters are reported to be 17.7% higher than previous year, while Danish figures suggested the continuation of high slaughters at +51.5% for the month.

 

It should be noted that all cow slaughter statistics do not differentiate between beef and dairy cows – however it is understood that the main trend is coming from the dairy herd.

 

cow slaughters

Source: ZMB

Milk production easing globally

While the EU has been the most dynamic dairy region in the last 12 months, many of our established competitors had also increased their output in the last couple of years, and this too fed into the supply/demand imbalance which has caused the prolonged slump we are only starting to see the end of.

However, many of those regions are now also starting to slow or ease output.

South America, from a combination of weather events and economic factors, has seen a massive downturn in production.  Argentina’s output for January to May 2016 was down an estimated 13.5%, and Uruguay’s 13.9%.

Australia’s output has been constrained by negative profitability and registered a 4.3% fall for January to June 16.  New Zealand, which was only up 0.4% for the same period, was actually down 1.4% for June supplies (a short lived, though whopping, typo from official NZ circles, had all of us all briefly thinking that their June supplies were back 10.4%!).

global milk output

Source: CLAL

EU intervention and APS continue to support markets

The EU Agri Council of 18th July, as well as putting forward a further €500m farm aid package, extended the intervention buy in period and the Private Storage (APS) deadlines past the 30th September and out to the end of February 2017.  This is a welcome move as markets remain unbalanced and delicate.

In the last week, 6,250 tonnes were bought into the scheme, down from 6,613 tonnes a week earlier as weekly volumes continue to ease back. This brings the total offered into the fixed price scheme for 2016 to 242,228. June stocks were reported at 287,415 tonnes, up from 223,174 tonnes in May.

On the SMP APS side 1,190 tonnes of SMP was offered into standard scheme last week, up from 297 tonnes a week earlier, bringing the total for 2016 to 12,588 tonnes. Enhanced SMP APS saw 1,669 tonnes offered, down from 3,590 tonnes a week earlier, bringing the 2016 volume to 28,001 tonnes and between the Standard and Enhanced schemes a combined 40,589 tonnes.

For butter there was 1,660 tonnes offered into APS, down from 4,442 tonnes a week earlier, and making it 116,168 tonnes since the start of the year. PSA butter stocks were reported at 99,379 tonnes at the end of June up from 92,548 tonnes in May.

This build-up of stock has led Rabobank to express some concerns on the overhang effect, however, the EU Commission has a good track record, and legal obligations, to dispose of stock carefully and without causing market disturbances.

Meanwhile, the flow of SMP into intervention appears to be slowing, reflecting the increase of average EU SMP prices to levels slightly above intervention buying in.

EU dairy prices continue to improve

In the last 10 weeks, on the back of the trend towards lower milk production, EU average dairy commodity prices have increased steadily and substantially, with butter price lifting by €490/t or 20%, SMP by a more modest €90 or 5.5%, WMP by 15.5% and whey powder by a whopping 28% (see graph and table below).

EU average commodity prices

Based on data from EU MMO

EU average commodity price increases

Based on data from EU MMO

The average EU dairy commodity prices reported for the week ending 24th July 2016 would return, for an Irish product mix, a gross return of 29.15c/l, before processing costs.  Assuming a 5c/l figure for those processing costs, this would allow for a farm gate milk price of 24.15c/l + VAT, or 25.4c/l incl VAT.

This is an increase of just over 4c/l in the last 10 weeks.

Time to increase milk prices?prices clipart

Co-ops have undoubtedly supported milk prices in recent months.  However, all would readily accept that the milk prices they are currently paying, at between 22 and 24c/l including VAT, are unsustainable for farmers.

With market returns improving steadily and the trend towards lower supplies appearing to be well installed, even before the EU production reduction scheme, it is fair now to ask that co-ops would start planning on returning improved milk prices over the coming months.  This would be as much help for farmers to cope with the financial stresses of cash flow shortages as to deal with the emotional impact they are having on themselves and their families.

And finally: Rabobank publishes top 20 dairy companies for 2016

Confirming the importance of co-ops in the global dairy industry, there are four of them among the top 10 dairy companies (Dairy Farmers of America, Fonterra, Friesland Campina and Arla Foods).  Also, Irish companies have yet to make it to the top 20 table – not surprising, as the turnover of Agropur, another co-op from Canada, and the smallest at number 20, is €4.1bn – as against Glanbia’s €2.8bn for 2015. (see table below).

top 20 dairy companies

Source: Rabobank

CL/IFA/29th July, 2016Cow

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