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24 Feb 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

GDT price fall reflect slightly less bad than expected 16/17 NZ output forecast

The GDT auction earlier this week saw a 3.2% weighted average price fall for the commodities, which are up for sale through monthly contracts for the period March to August 2017.  WMP is always the most influential product, because the most traded product through the auction, and it saw its average price fall by 3.7% compared to the previous auction.  SMP fell by 3.8%.

However, butter held its own at +0.2%, and it is clear that butterfat continues to be the most buoyant product on global dairy markets in the last 12 months or so.

This week’s downturn in the GDT auction reflects a revised output forecast by Fonterra for the 16/17 season from a 7% fall to a very slightly more modest 5% fall.  This was because of slightly more favourable rainfall in recent weeks, and a better than expected performance in January milk production (+0.8%) so that the June to January season total todate is now 2.88% down on the same period last year, well down on the June to November result of 3.71%.

Source: GDT

Fonterra have maintained their milk price forecast at NZ$6/kg MS, which with the co-op’s expected dividend payment should yield NZ$6.50-6.60 for 2016/17 milk (30c/l approx including dividend at Irish solids levels).

Source: Fonterra

Chinese demand continues strong

While there is some concern about demand from some regions – because the slight slippage we have seen is clearly not supply driven – demand from the hugely influential Chinese buyers has increased massively in 2016 – by 20% by volume, and 12% in value.

Source: CLAL based on GTIS

Butterfat the best performer… with whey powder

At EU level, dairy market prices have slipped a little in the face of some global political uncertainty, and despite continued global production decreases.  However, butterfat continues to outperform milk powders, while whey powder is continuing to firm steadily.

The net result leads us to maintain our guidance on milk prices.

Based on the prices reported by the EU MMO for 19th February, gross returns remain around 37c/l, not far off where they have been through December and January.  This represents a milk price equivalent of 32c/l + VAT (33.7c/l incl VAT), which is around 2.5c/l more than is currently paid by co-ops (January milk price).

We therefore believe there is scope for further increases, in order to reach 33c/l before peak.

Based on: EU MMO data

EU 2016 output up by only 0.4%

The figures for the full year 2016 are only just out, and the EU will have produced only 0.4% more than in 2015.

Looking at the April to December figure, this is down by 1.7% as the downward trend started in earnest from May 2016.

Milk processing in 2016 saw an increase in all the main product categories, although for the April to December period, all products bar fermented milk decreased significantly, while cheese maintained itself (see graph below).

Source: EU MMO

Tough decisions time for Dutch dairy farmers

Dutch farmers are being faced this year with an obligation to either acquire more land, or cull cows to reduce stocking density.  A new ruling, coming into play from 1st March, will require farmers to reduce overall phosphates output by 4,000t.

This is estimated to be equivalent to a reduction in the national herd of 100,000 cows (in tranches).  However, farmers can also fulfil their phosphates reduction obligations by reducing their stocking rate (acquiring more land).

Land prices are very high: as much as €80,000 per hectare, according to one 2016 estimate. So for the majority of farmers, this is expected to be about reducing the number of animals by a reference number, based on the size of their herd in July 2015.  We understand they will be incentivised to do this, with a €1200/cow level to be paid on the first 10,000 in the first of three tranches, and a falling level thereafter.  We gather the first phase has been oversubscribed.  The reduction is over 10 months, with a target for each 2 month period within that, based on the number of cattle on the farm on Oct 1 2016.  Farmers who fail to meet their targets within the plan will be fined €240 per livestock unit per month.  Evidence of disposal of the cows (by slaughter or export to other countries) will be required.

This can only result in a significant reduction in milk volumes – in 2016, Dutch milk production was up 7.5% on 2015, and it was up 1% in January 17 versus January 16.  The lower 2017 Dutch output will add to the EU overall slowdown in sustaining the trend of supply deficit for some months yet.

CL/IFA/24th February 2017

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