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18 Nov 2016

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

EU Commission wants to start releasing some SMP as dairy markets continue very strong

The EU Commission has this week mooted the release of around 22,500t of SMP produced pre Dec
2015 from intervention storage.  The product is held in Belgium, Lithuania, Poland, Ireland, France and the UK.  This decision can only be made further to a positive vote at a Management Committee meeting, planned for next week (24th Nov), and it is expected to meet a lot of objections as SMP prices have not recovered to the same extent as other dairy prices.

However, the quantity is not huge, and even if it were to be released, what matters most is the price point.  If OKd by the Management Committee, the product will sell by tender, and the EU Commission can decide where to draw the line on price.  Having spent almost €1b supporting mostly the dairy sector in the last 12 months, it is unlikely that the EU Commission would sell SMP below the going rate – allowing for the fact that the product to be released is nearly 12 months old.

Current SMP stocks stand at around 350,000t, and no product has been sold into intervention since mid-September – since mid-August in the case of Ireland.  Ireland has sold a total of 35,996t into intervention in 2016, which represents just under 11% of the total sold in – as against 15.5% for Belgium, 18.5% for Germany and nearly 20% for France.

Massive powder price lift in GDT

This week’s GDT auction saw a 4.5% lift in the index, following from a massive 11.4% in the first November auction.

Releasing intervention SMP might be made less disruptive of markets if the GDT 9.8% price increase were to influence EU prices – which it probably will!  SMP GDT price is up 55% since last May.

WMP prices have also risen spectacularly, by 3.2% in the 15th November auction, and by a total of 66% since last July. Butter prices are up 56% over the same period (1.1% in the last auction).

In fact, in this auction, all products saw uplift, including an 11% increase for Cheddar prices, and a 4.4% increase for AMF (butteroil).

Expected lower volumes linked to poorer than normal immediate post peak weather conditions and (very recently) damage and disturbance caused by a series of earthquakes are all contributing to reducing output expectations in New Zealand (see below).

Fonterra have reflected improved dairy markets by increasing their forecast milk price by 75c to NZ$6/kg MS in the last day – which together with the expected Fonterra dividend would add to a payout of NZ$6.50 to 6.60/kg MS (around 30 Euro cents per litre in Irish terms).

gdt-results

Source: GDT

GDT 15th November Butter and SMP above are equivalent to a gross return of around 39c/l before processing costs – this is not only due to the increase in the GDT SMP and butter prices, but also in the massive fall in the Euro value against the US $ in the last few days – see graph below.

exch-rate

Source: XE currency charts

NZ output disrupted by low profitability, bad weather and… earthquakes

Wetter than normal spring conditions as New Zealand is at peak have put pressure on supplies.  There is no data yet for October supplies (peak month) but output had been down in both July and August (-3%), with a very small uplift in September (+0.3%) and expectations are that peak month October will see a further fall.

A major earthquake in the South Island on 14th November and a series of strong aftershocks have caused significant infrastructural damage, disrupting milk collections to some extent.

nz-supplies

Source: DCANZ

Fonterra expect a very definite lower output this season than last, as outlined in one of their most recent forecast – the graph below says it all:

nz-supplies-2

Source: Fonterra

Source: Fonterra

EU dairy prices – a very small wobble, and a return to form

In the last two to three weeks, we have seen prices settle a little, then return to steady improvements, as is visible in the graph below.

The first November GDT results clearly influenced matters in Europe – if only by influencing the all-important buyers’ sentiment.

eu-average-prices-graph

Based on data from EU MMO

Gross returns based on the average prices above were equivalent to 36.25c/l before processing costs for an Irish product mix at EU average price levels (table right below).  Including the Irish reported butter and SMP price, this would be a gross return of 35.19c/l (table left below).

These figures suggest that average EU dairy markets are returning currently a farmgate milk price equivalent of 32.87c/l incl VAT (EU averages) or when using the Irish SMP and butter price, of 31.75c/l including VAT.

This is roughly between 3.75c/ and 4.9 c/l more than the main milk purchasers are paying for October milk.  So, some scope for further improvements, which should help set farmers up for viable milk prices before spring.

eu-average-returns-table

Based on data from EU MMO

EU and global milk collections continue to fall in September

The table below reports milk output in the EU for 2016 up to September.  It is the third month in which EU milk output has been falling relative to last year.  September collections were down 2.8%, and the year-to-date output is now up by 1.72%

Individual member states are all now in negative month on month territory, except the Netherlands, while France and the UK have recorded year-to-date fall backs also.

eu-output-to-sept

Source: FCStone

Globally, milk production is also continuing to slow.  The main global milk producing countries recorded an increase of only 0.9% cumulatively for 2016 to September.

global-output-to-sept

Source: FCStone

There is no real prospects of significant milk output recovery in the coming next few months, as EU is at trough, New Zealand struggling, and only the US are any way dynamic.  Markets are rebalancing from the supply side, and prices are rising in consequence.

There is strong scope for continued price improvements at price levels, with a long way for most farmers to go to cover costs on the basis of viable milk prices and meaningful volumes next spring.  Co-ops should make the most of the coming months to build up farmers’ milk prices to bring them back into positive margin territory as soon as possible.

CL/IFA/18th November, 2016cow

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