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13 Jan 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Dairy Market Blog – 13th January, 2017

Strong dairy trends set to continue – CLALhappy-ny

Erhard Richarts, dairy expert and Chairman of the German Kiel based IFE (Institute for AgriEconomy), in a report for CLAL issued late last month, predicts that EU 28 milk production will trail behind previous year level at least for the first half of the year, falling by 2.4m tonnes.
Globally, he expects the 2016/17 season to see a 1.2% fall in the combined milk supplies of the EU 28, the USA, New Zealand and Australia (see graph below).

clal-combined-world-milk-supplies

Source: CLAL

Looking at recent supply dynamics, Mr Richarts’ report suggests October milk production by the main exporting regions was as much as 3% down (see graph below), with a rapidly falling trend, despite continued production increases in the US.

clal-global-variations

Source: CLAL

The EU 28 output is well down in all countries, with even the very dynamic Netherlands now growing more slowly, as per the graph below.

Dutch problems with phosphates levels as part of their failed nitrates derogation extension will force the elimination of large numbers of cows, affecting production capacity in a big way (between 1 and 2 million tonnes).  In Germany, a recent dairy cattle census has shown a fall by 67,000 cows, including 1-2 year-old heifers from the herd, again affecting the production capacity of the largest milk producer in the EU.

Elsewhere, while prices are recovering, they remain still below production costs, especially when farmers have experienced upwards of 2 years of negative margins.

Irish output grew very slightly in November according to CSO, by 0.5%, so that Jan-Nov Irish production was up by 4.8%, so that, even with the predicted December increase called by the Farmers Journal on the basis of an informal survey, full year production may well be up by no more than around 5%.

Sensibly, and unsurprisingly, the report goes on to say that the 6 m tonnes increase in EU milk production in the 12 months that followed the end of quotas was very unlikely to repeat itself in the foreseeable future.

clal-eu-28-milk-production

Source: CLAL

Intervention SMP – EU Commission holds out for market price

353,555t of SMP are currently in EU intervention stocks, and there is no denying that its very presence is affecting the market.

However, the EU Commission in the December tender (only 42t out of 22,000t sold at prices above €2150/t) and in the January tender (zero tonnes sold out of the 22,000t because no bid exceeded €2000/t) has proven its determination to avoid disrupting markets.

In his report for CLAL, Herr Richarts suggests that the downturn in EU milk production could reduce fresh SMP manufacture by 240,000t, by more if milk is diverted to cheese and WMP.  He is clear that there is “no hurry to sell”, referring to the experience of successfully disposing of SMP stocks without damaging the market recover in 2009/10.

Import demand to remain strong in China – Rabobank

Rabobank, in their monthly China Food and Agribusiness Report, state that, despite increases in domestic milk prices which should lead to increased home produced milk volumes, faster growing demand will continue to rely heavily on imports.

They predict a 20% increase in dairy imports for 2017.

On the demand front, the CLAL report suggests that, while domestic EU market demand will only grow modestly, mainly in the cheese sector, during the year, demand will continue to grow in third countries importing dairy products from the EU – even allowing for the increased prices.

On dairy prices, Erhard Richarts for CLAL also predicts a “stable to firmer” evolution of dairy prices over the next number of months, with possible further increases in butter, and a more stable trend – but at “elevated” levels for protein and powders.

EU dairy prices continue strong

EU MMO figures for dairy commodity prices to week ending 8th January shows a slight easing of (very high) butter and WMP prices, a slight increase in SMP prices (despite overhanging intervention stocks), and a continued firming of whey powder prices.

Looking back to the full year 2016 and into the early days of 2017, it is clear that, from May/June, prices of all commodities started to rise, with very strong evolutions for butter, cheddar cheese, WMP, and whey powder, and more modest, though significant increases for SMP.

In this one year period, butter prices rose by over 44%, SMP by 23%, WMP by over 34%, Cheddar by over 15% and whey powder by 55%.  The Dutch commodity cheeses Edam and Gouda increased strongly, by 28.6% and 26.3% respectively.

eu-dairy-product-price-graphs

Based on EU MMO data

eu-dairy-product-price-table

Based on EU MMO data

EU product returns have remained very much on the trend we experienced in December.  Gross returns for a representative Irish product mix, based on the average EU dairy prices quoted for the week ending 8th January, would yield a gross price just under 38c/l (before processing costs) – which net of those costs would be equivalent to a farm gate milk price of 32 to 33c/l + VAT.

eu-dairy-product-returns

Based on EU MMO data

Should we worry about the last two GDT auctions?

The last GDT auction of December and the first for 2017 on 3rd January both scored a negative weighted average price evolution (-0.5% and -3.9% respectively).

However, individual products fared differently, with both SMP (+2.3%)  and butter (+0.5%) registering price increases in the 3rd January auction.  Cheddar and buttermilk powder (BMP) also saw price increases, of 1.4% and 4.5% respectively.  WMP tends to determine the overall results, and WMP prices fell by 7.7% in that auction.

However, the average SMP and butter prices achieved in GDT on 3rd January would have yielded an Irish equivalent milk price of 36c/l before VAT!

Also, it is worth looking back over the last 12 months, to see that the main commodity prices have increased very substantially indeed.

gdt-prices-last-12-months

Based on GDT data

Scope for further Irish milk price increases into 2017

The December Ornua PPI increased by 4.4 points to 103.8 points – equivalent according to Ornua’s own calculations – which factor in 6.5c/l processing costs – to a farm gate price of 29.28c/l + VAT (30.8c/l incl VAT).

ORNUA PPI – DECEMBER 2016

ornua-ppi

Source: Ornua

AS we write, Lakeland have increase their December price by 1c/l to 28.75c/l + VAT (30.6c/l incl VAT), while Glanbia have decided to increase the base GII price by 1c/l, but as the co-op 1c/l top up is no longer being paid, the December payout will remain the same as the November price at 28.45c/l + VAT (30c/l incl VAT).

Ornua have forecast an average 2017 creamery milk price (at 3.3% protein and 3.6% fat) of up to 33c/l, and Kevin Lane confidently predicted this week at the Progressive Farmers’ conference that prices would break the 30c/l.

It is clear that market returns are continuing strong, despite concerns around Brexit and European politics, fears about the potential global fall out of the Trump presidency in the US, and still relatively low oil prices.

With supplies in check for the 2017 Northern Hemisphere peak, and customer supply contracts being negotiated at increasing prices, co-ops should have the wherewithal and the confidence to increase milk prices to at least 33c/l before spring peak.

 

CL/IFA/13th January, 2017happy-moo-year

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