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07 Feb 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

GDT lift belies a wobble in the dairy market recovery

Futures markets and spots had been easing in recent weeks, in response to a multitude of factors: political uncertainties linked to Brexit, the election of Trump and its impact on global trade, and expectations of political instability in Europe with major elections in France, the Netherlands, Germany, Hungary and elsewhere.  The large SMP intervention stock the EU seems unable to shift and the closing of SMP APS at the end of this month were two more factors mentioned by analysts.

However, today’s GDT surprised all commentators who expected a potentially significant price fall in powders and butterfat.  In fact, the weighted average price rose 1.3%, with WMP up 1%, SMP more or less unchanged at +0.1%, butter up by 4.9% and AMF (butteroil) up by 4% – clearly showing that the buyers on the virtual auction floor realised that milk scarcity remains an issue globally!

Source: GDT

Milk scarcity deepens

The dramatic fall back in global milk production continues, and it is now being compounded by the coincidence of the beginning of the Oceanian seasonal trough and the slow pick up in the EU’s run up to peak.

December figures are starting to trickle in for the most important dairy regions and individual EU countries: milk supplies for the year 2016 from the main 5 exporting countries and a few more (see table below) were up only by 0.2%, with significant decreases in New Zealand (-1.7%), Australia (-6.7%), Argentina (-14.4%) and continued increases in the USA (+1.9%).

Source: CLAL

Delivery figures for December in the main EU member states are rounded up in the table below.  There is a very significant downward trend, and the prospects of this trend changing are very slim this side of the middle of the year as milk prices remain below production costs in many of those countries.

In the Netherlands, where exceptionally output growth did not falter through 2016, a major cow cull will now be needed to reduce phosphates output levels below those on which the Dutch nitrates derogation depends.

Some reports have suggested half a million cows may need to be removed, which would be equivalent to nearly a quarter of the Dutch production capacity, and around 2% of the EU milk pool.  More likely, the number of cows needing to be culled will be around 200,000 – still a very significant number, which will materially affect EU milk supplies from this year.

ROUND UP OF EUROPEAN MILK COLLECTIONS
Country December 2016 v 15 Full year 2016 v 15
France -7% (estimate) n/a
Germany n/a n/a
Netherlands n/a +7.2% (estimate ZMB)
UK -4.96 % (preliminary) -4.27%
Italy -4.45% +2.46%
Denmark -4.97% -0.02%
Belgium -11.78% -2.89%
Spain -1.9% +1.4%
Ireland -2.2% +4.4%

Based on Eurostat, CSO + various estimates

 

 

Dairy prices – some mixed messages, but market returns remain strong

While spot milk prices in Italy and the Netherlands had been easing for the last couple of months, they have been picking up a little in the last week or two.

Late January UK spot prices are reported down to 26-27ppl (31cpl) from a peak of 40ppl a few months ago, despite continuing falls in production.

Source: EU MMO/CLAL

Dairy commodity spots in Northern Europe have been back by around €100/t butter last week, by around €60/t of SMP, and stable for whey.

It will be interesting to see how next week’s spots and futures react to this week’s GDT results.

Source: FCStone

EU average market returns as tracked by the EU Milk Market Observatory clearly show that while butter, powder and Cheddar cheese have eased slightly, prices have remained at high steady levels for the last couple of months.

Late January 2017 commodity prices are well up on those recorded 12 months previously: butter has risen by 51%, SMP by 24%, WMP by 47%, Cheddar cheese by 19% and whey powder by 60%.

Furthermore, the reported Irish prices for SMP have been catching up with the EU average, while Irish butter prices now exceed it.

Returns from a representative Irish product mix, based on 29th January EU MMO figures (see tables below), after processing costs of around 5c/l, would be equivalent to a farm gate milk price around 32c/l + VAT (or 33.73c/l incl VAT, allowing for the new increased 5.4% VAT refund announced in Budget 2017).

Based on EU MMO data

EU milk prices up 25% since July 2016

The EU MMO suggests that, since the price trough of July 2016, the average EU milk price has risen 25% from 25.68c/kg to 32.03c/kg.

Over the same period, the Irish milk price (based on average Farmers Journal Milk League) has risen 27.5%.  Note, the graph below is in cents per litre.  The June milk price, in cents per kilos, would be 21.82c/kg, and the December price 27.83c/kg – an increase of 6c/kg.

Based on Farmers’ Journal league – simple average

With a continued trend to scarcer milk supplies and dairy commodity prices continuing reasonably strong, there is clearly scope for Irish co-ops to increase Irish farmers’ milk prices beyond the levels reached for 2016, and this before peak to enable dairy farmers to optimise their income recovery and fully settle their outstanding 2016 cash flow difficulties.

VAT increase from this month’s milk cheque – farmers must benefit fully

The VAT refund on January milk will be up from 5.2% for December milk paid in January to 5.4%.  The VAT refund is paid out of the National Exchequer, and does not affect returns available to milk processors.

It is therefore essential that no attempt would be made to subsume the increased VAT rate into the base price.  29c/l  + VAT would have equalled 30.5c/l incl VAT at the previous lower rate, but the same base price should now be equivalent to 30.57c/l incl VAT at the now prevailing rate.

US whey product exports soaring

In this month’s blog, the US Dairy Exporters’ Council has identified whey product exports as a major priority for the US dairy sector, showing significant growth in 2016, especially whey protein concentrates, and expecting more of the same going forward.

Source: USDEC

The USDEC identifies three global demographic groups of consumers who will drive demand for whey products and create opportunities for US exporters: health conscious adults and seniors (whey protein may reduce the risk of sarcopenia, or muscle mass loss); infants and toddlers and middle class fitness enthusiasts.

This is nothing new to us: the National Dairy Council has already researched and highlighted those consumer groups.

The US Dairy Exporters have further identified South East Asia, China, Japan, South Korea and the Middle East as the main areas within which to target those consumers.

These are obviously markets and demographic groups our own industry has been targeting.

From a dairy perspective, it has been obvious for some time that the US was fast becoming a force to be reckoned with on the world market.  It will be interesting to see how Donald Trump’s trade policies affect the ambitions of US exporters.

CL/IFA/7th February, 2017

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