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15 May 2014

Dairy Market Blog

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15th May 2014 – Lower commodity and milk prices forecast for 2014

Milk output surge continues

The surge of milk production continues in the EU and the US.
EU supplies, up by 4.9% for the Jan-Feb 2014 period compared to previous year, were boosted by good production conditions, strong milk prices and relatively low feed costs. In some places, milk supplies exceed peak processing capacity, resulting in some “distressed” parcels of milk or condensed skim loads selling at low prices. However, the EU season is now past peak.

May 2014 Dairy 1

In the US, significantly increased production has helped US exports reach new records – the highest butterfat exports in more than 20 years, and March 2014 being the 12th consecutive month of export values exceeding US$550m.

May 2014 Dairy 2

In New Zealand, the season is coming to an end as farmers prepare grazing land for the new season. Some stormy conditions in the North Island has led to slightly earlier drying off.
Australian production has benefited from localised and badly needed rains, however an El Nino event is forecast which may bring further drought over the coming months.

May 2014 Dairy 3

May 2014 Dairy 4

 

Demand easing temporarily as stocks fill up and currency factors intervene

Demand is easing as China is believed to now have filled their stock requirements for the short term, and have entered their own seasonal peak. There are also reports of restrictions on imports of powders for infant foods, as the Chinese Government is trying to foster domestic producers, who currently account for only 40% of domestic consumption. This may however go against the trend as consumer confidence in domestically produced dairy is low, and it remains to be seen whether it will be sustained. Traders also expect that Chinese demand will reappear in the second half of 2014, when the stocks built up have been utilised and the national supply season tapers off.

Currency fluctuations against the US$ have also affected demand from other countries, especially from Mexico.

Generally, European and global buyers are holding back on any purchases other than short term, in anticipation of lower prices.

There are however some large powder tenders pending in North Africa, which it is hoped by sellers could help underpin prices.

Also, lower international prices have led some sub-Saharan African buyers back to the market, who had shied away because of high prices in recent months.

Despite political uncertainty, Russian demand is holding its own for butter and cheese. Recent analysis by Irish/Russian economist Constantin Gurdjiev has indicated that there has been little or no negative impact on the food trade between Ireland and Russia from the Ukrainian/Russian crisis.

Commodity prices easing – but no collapse

At EU level, Cheddar cheese is holding its own at pretty stable and historically high prices of around €4,000/t since last November. Other cheeses, except Emmenthal, have eased a little.

Since January, butter prices have come back by €590/t, SMP and WMP by a more modest €320/t and €370/t respectively. Whey powder has held its own around €1,000/t for the entire period (currently around €960/t).

May 2014 Dairy 5

Globally, the market weakness has been both reflected and transmitted by the GDT auctions, which have seen 6 consecutive negative price corrections since February. However, the more recent corrections were very modest (-1.1% for the first May auction). All eyes will be on the next auction next week (20th May).

The last auction showed strong price increases for Rennet Casein (+6.8%), but butterfat also showed price increases: +2.4% for AMF, and +1.6% for butter.

Powders, which always account for the major part of the trade by quantity, were down 2.3% for SMP, and 1.7% for WMP.

May 2014 Dairy 6

Global commodity prices reflect the same trend, with steeper falls in Oceanian prices than in the prices of products originating from Western Europe.

May 2014 Dairy 7

May 2014 Dairy 8

Irish milk price outlook for the rest of 2014

April milk prices are absolutely sustainable: the IDB index for that month remains well above historical averages, even if it is back on the earlier part of the year.

Bearing in mind that the IDB April index is 28.7% above the base of 2010, a milk price 28.7% above the 2010 average of 29.3c/l + VAT, i.e. 37.7c/l + VAT (39.6c/l incl .VAT), would be sustainable.

Furthermore, EU/Irish commodity prices for the month averaged out at a gross (before processing costs) equivalent return of around 43c/l, which would also comfortably justify current prices.

May 2014 Dairy 9

While markets have already weakened somewhat, and may weaken further, producer milk prices within the EU are only just starting to ease (see previous market blog dated 28th April). While global supplies run ahead of demand, and commodity prices continue to ease, the pressure to reduce producer prices will continue. However, the underlying demand trends continue positive, so this will likely be a temporary situation.

The most recent available EU commodity prices (11th May 2014) suggest slightly lower returns from early May than late April (see table below). However, assuming processing costs of 5c/l, and assuming no further easing in individual commodity prices, the gross return of 42.95c/l still justifies the continuation of milk prices of up to 38c/l + VAT – which comfortably covers current milk prices.

May 2014 Dairy 10

CL/IFA/15th May 2014

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