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29 Oct 2014

Dairy Market Blog

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Turbulent imbalanced markets set to continue for some months – but prices will recover, underpinned by continued strong global demand growth.

EU supplies up 5.8% to July

Only Greece recorded negative production growth for the period from January to July 14 compared to the same period last year. The big dairy producers increased very substantially: France by 7.4%, Germany by 4.4%, the UK by 10.2%, Poland by 7.5%, the Netherlands by 3.4%, Denmark by 3.3%and of course Ireland by over 7%. Most of these countries are gearing up for the post quota era, with some degree of expansion plans. However, there is an expectation of some slow down over the coming months as farmers in the expanding regions try to minimise their superlevy exposure.
While the EU is contributing in a significant way to the international market imbalance, they are far from alone: New Zealand and the US, both active exporters, are also well up (see below). It is important to remember that just as quotas did not prevent low prices in 2009, their removal in 2015 is not what is causing poor prices either.

EU deliveries Jan-Jul 14
Source: EU MMO

 

Milk supplies elsewhere also still rising

US supplies grew by 1.8% for the January to August period. The USDA is forecasting 2% growth for the whole year, and 3% for 2015 output. The This reflects higher cow numbers, still strong dairy/milk prices (see below) access to cheap feed and labour, and margin protection.
New Zealand early season June to August 2014 reveals a production increase of 5.1%, indicating a trend towards slower growth. Fonterra forecast a whole season increase of in the order of no more than 3-4%. Weather conditions are wet at the moment, as we reach the seasonal peak.
Australia supplies are up 1.9% for the early season (Jul-Aug 2014).
In Argentina, poor weather conditions for the last 6 months have seen continued decreases. August supplies were down 2.7% on previous year.

 

EU SM powder prices continue to ease

The supply/demand imbalance continues, as does the knock on effect of the Russian ban on dairy commodity prices.
While all commodities remain under pressure at EU level, the prices for SMP are continuing to ease especially, with extra milk which would have gone to cheese exported to Russia now going to powder/butter. SMP stocks are beginning to build as demand is limited, and prices have eased further after the effect of the most recent Algerian tender dissipated.
WMP prices appear to have stabilised, except in Germany where prices fell by €50-60/t. The general price stabilisation comes from lower production (milk going to butter/SMP instead), and relatively light demand focused on fulfilling existing commitments.
It appears that the APS scheme has helped stabilise butter prices. There are some reports of improving demand as buyers are looking to fill 2015 needs.
EU cheese markets (for all cheeses, not just Cheddar) appear to be now more balanced. Christmas sales and falling milk volumes are supporting admittedly relatively low prices. Demand from Poland is rising, and export demand is also responding to affordable prices.
UK spot milk prices have increased to 26-27p/l (34c/l at current exchange rate), indicating seasonally declining volumes.
UK cheddar cheese markets show a big gap between mature and mild cheddar prices: Mature fetching between £3,300-£3,850 while mild trades at £2,650-£2,750 (equivalent to gross returns, with average EU whey powder prices included of up to 55 c/l for the dearer mature, and 41.5c/l for the dearer mild variety).
The graph below outlines the average commodity prices reported to the EU Commission weekly by Member States, and now reported with the same frequency by the Milk Market Observatory.

EU avg dairy prices - 19th Oct 2015

Based on: MMO figures

Gross returns from those commodity prices (EU average for all commodities) are outlined in the table below, and reflect after costs are deducted the kind of prices currently paid by some of Ireland’s main milk purchasers.

Table re returns 19th Oct 2014

Based on: MMO figures

 

IDB index for September equivalent to farmgate price of 33.9c/l incl. VAT

The graph below outlines the IDB Product Purchasing Index for the period 2011 to 2014. The base for the index was trade and prices for 2010. As the 2010 average milk price was 29.3c/l + VAT, a September index of 110.2 would justify a milk price of around 33.9c/l incl. VAT.

IDB index
Source: IDB

Rabobank Q3 dairy report suggests markets have bottomed out – but will take time to recover

Global prices, as indicated by the GDT results of 15th October, appear to have bottomed out. Comments from Rabobank’s dairy analyst Tim Hunt in the Rabobank Q3 Dairy Market Report published earlier this month confirms this.
However, Rabobank also states that it will take a number of months of low prices to help rebalance markets to the point where prices can recover, as while supply growth with lose momentum as milk prices weaken in all production regions, it will take some time.
Of course, this assumes the absence of other factors – weather events, or other such which could curb supplies faster. The Australian ENSO monitor continues to forecast the likelihood of an El Nino event at 50% (twice the normal), but also states that its impact, if it materialises at all, would most likely be moderate.
The reasons for the Rabobank prediction are a combination of Europe gearing up for the end of quotas, with a number of countries (Ireland included) ready to increase production, falling international feed costs, and delays in international price signals reaching the farm gate.
Rabobank expects Chinese purchases to resume, but at a lower level than those (exceptionally high!) of 2013 to early 2014.
It goes on to state that US and EU commodity prices have been hit less hard than international prices. The GDT weighted average price has fallen by 48.5% from early Feb 14 todate. EU commodities have held out better since their 2014 peak (Jan/Feb). Butter prices have fallen by 26%, powders by 37-38%, cheddar cheese by 13.5% and whey powder by 9.5%.
US dairy markets late in reflecting international downward trends
US dairy prices seem to operate quite independently from international trends, though those are starting to catch up. Butter prices had been rising spectacularly throughout 2014 until 5 week ago, when they started falling – by a massive 38 % todate. SMP (Non Fat Dried Milk ) fell by 1/3 since last March. (See two graphs below).

US butter prices us smp prices

 

Clearly, this has yet to be reflected into producer milk prices, which having eased from April to June started rising again (see Class III milk price below. Class III milk is milk processed into powder/butter).

US Class III milk prices

Cheese prices, which underpin Class IV milk prices, have varied up and down during the year, but remain at record high levels todate, defying international trends (see graph below).

CME cheddar prices

 

Source: USDA

This late reaction to the international downward trend means that producer milk prices remain high. The USDA is forecasting a 2% production increase for 2014, and a 3% increase in 2015, partly because of still strong milk prices, but also because of low costs, additional cows, and the fact that many US dairy farmers have been able to lock in attractive margins for a period of time.
With the strong export vocation of the US, these continued trends will also feed into the potentially slow turnaround of international dairy market prices.
Global market prices bottoming out, and evidence of some firming in demand

Most global commodity prices appear to have started bottoming out or even firming (see first two graphs below).
While international trade quotes for SMP still appear to be decreasing in October, it is also clear that EU quotes are very competitively priced to avail of any export opportunity – and indeed are doing just that. The weak Euro v. US $ is also helping European competitiveness.
Chinese imports of butter are reported to be rising strongly (admittedly from low levels) and with many exporters focusing on SMP/butter in lieu of WMP, which the Chinese are not importing in any quantities at this time, though they are importing SMP in meaningful quantities now.
There are also good reports of rising demand for NZ butter and cheese in SE Asia, especially Japan.
South American production is focused on replacing banned imports from other areas into Russia. Uruguayan exports to Russia have increased from 110t last year to 2000t this year, firming strongly South American Gouda prices in particular.

global WMP quotes

global butter quotes

 

global SMP quotes

 

Source: EU MMO

 

Longer term demand: forecasts remain very strongly positive

The Tetra Pak Dairy Index (see Dairy Market Blog of 8th October) stated it clearly, global dairy demand will continue to outpace milk production.
The recent OECD/FAO Agricultural Outlook while more conservative in terms of the annual global demand increase for the next decade (2% v. Tetra Pak’s 3.6%), also comes to the same conclusion, expecting global milk supplies to grow more slowly due to increased water stress in certain regions.
The OECD also forecasts a continuation of the trend towards rising dairy product prices for the period (see graph below).

OECD dairy price trends

See the OECD/FAO 2014-2023 Agricultural Outlook at
http://www.oecd.org/site/oecd-faoagriculturaloutlook/dairy.htm

CL/IFA/29th October, 2014

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