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07 Apr 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Dairy markets would be fine, if it weren’t for SMP!

This week’s GDT auction certainly helped improved sentiment, as it was the second one to show an uplift after a worrying couple of auctions in February and early March.  But while the previous auction, at +1.7%, hid an SMP price fall of over 10%, this week’s +1.6% appears to show some stabilisation in SMP prices. (see right).  It is worth remembering that, despite the fall in the price of SMP in the last couple of auctions, the SMP/butter prices reached on 4th April were equivalent to a gross return of 35.72c/l before processing costs.

The NZ press coverage especially emphasised the fact that this supported the continued milk price forecast of NZ$6.00/kg + 55c or so dividend (30c/l) for the 16/17 season.

Source: GDT

Looking at EU and global dairy prices, butterfat (butter, butteroil, cream) continues to perform quite well, with cheese and whey products also holding their own.  Powders have been more challenging.

351,777t of SMP in intervention continue to overhang markets, and for the first time since last September, 472t of Polish SMP were sold into intervention last week.

The EU intervention stock is equivalent to approximately 1.6% of the EU’s milk output, and 17% of annual global trade of SMP, according to USDEC.  This makes it a significant enough problem – however, in recent days, EU Commissioner for Agriculture Phil Hogan has again reiterated that the EU Commission would not sell intervention SMP “until the price is right”.  “The EU Commission will act cautiously and prudently in returning these stocks to the market”.  Only 40 t were sold last December in the first of 7 auctions.

While average EU prices for SMP on 2nd April, as reported by the EU MMO at €1790/t, remain around €100/t over the €1698/t buying in price, trade had been reported for a few weeks now at prices below intervention buying in levels, and this week’s spots seem to have stabilised around buying-in level (table below).

The same spot quotes show how strongly butter continues to perform and stability in whey.

Source: FCStone

Global production continues down on last year’s – with signs of recovery in second half

EU milk output for February continued below the same month last year.  The USDEC estimates EU production to be down around 2% for the first quarter of the year – this is 3.2million tonnes less milk over the mid-16 to March 17 period than in the previous year.

Most member states’ production in February 2017 was back on February 2016, as follows:

  • The Dutch cow reduction scheme aims to reduce the national herd by 3% this year. But even before this came into play, the Dutch milk output was down 4% in February;
  • Ireland’s output was back 7.8% for February, or 4.9% down for the January-February 2017 period compared to the first two months of 2016;
  • France is predicted to fall 4.3% for the full Apr-Mar 16/17 season;
  • German milk output continues below last year’s, down 2.9% for week beginning 13/03.
  • UK deliveries, which had fallen far below year-earlier for much of 2016, were 1% below previous year for the last three weeks of March.

Outside of the EU, production trends also remain back on previous year, except in the US:

  • New Zealand’s volume for February was down 2.9 % (though solids were up 3.3%).
  • Australian production continued to decrease, by 10% in February, and by 8.4% for the calendar year todate.
  • The US, up 2.3%, remains the exception as the most dynamic dairy region.

However, it is worth noting that, with the level of decrease against year-earlier reducing, the combined total production is recovering. (see right)

Source: AHDB

Source: USDEC

The EU Commission predicts a very modest EU production increase of 0.6% for the year 2017, while the USDA puts this at 0.5%.  Some commentators are adding that the impact of the Dutch cow reduction scheme will keep any increase modest.

The US Dairy Exporters Council (USDEC) prediction for the 5 main production/exporting dairy regions is for total milk production to increase from mid-year in net terms relative to 2016. (graph above)

They expect to see New Zealand production down 1-2% for the 16/17 season, the second negative growth season, but with improved pasture conditions in recent times and a milk payout allowing most producers get back to profitability, they see an improvement in output into the new 17/18 season.

Australian production, they say, is headed for a 21 year low, down 8.2% for the first seven months of the season, and this calendar year started in the same vein, with a 10% fall back in February milk production.

Australian agri-economic bureau Abares, however, forecasts the first rise in milk production in years from next season.  They predict a 2% recovery in 2017–18, assuming average seasonal conditions. Herd numbers should recover by 1%, reflecting forecast milk price uplifts.
Milk production is projected to rise consistently to around 9.6 b litres by 2021/22 (from 8.9b litres in 16/17). This is based on the expected recovery of the dairy herd and improvement in milk yields.

Rabobank, in its Q1 Dairy Quarterly report for 2017, sums up their 2017 forecast as follows: “Global levels of milk production continue to fall.  The rate of decline is decreasing, but the levels of export surpluses from the big 7 dairy exporters are unlikely to increase until the second half of 2017”.

US exports to be reckoned with

We have known for some time that the US is now a competitor to be reckoned with on the world market.

In the last 9 months, US exports increased 14% (15% in December), or 18% once adjusted for leap year.

152,856t of product overall were exported, with SMP(NDM) up 26% to 52,000t.  Shipments to Mexico increased 38% to 25,500t.

EU and NZ exporters have had to contend with the US as a major competitor on the market place, and this has contributed to keeping the lid on SMP prices.

Source: USDEC

Demand: China to remain dependent on imports

It is important not to lose sight of the fact that balance between supply and demand has tightened considerably since the middle of 2016, and even some output growth in the second half does not have to mean a further destabilisation of prices.  However, much depends on how demand evolves at the same time.

The first, positive element is the fact that China has been back actively purchasing dairy products for some months now.

In 2016, Chinese dairy imports increased by 20% in volume.  While there was some fall back in January 2017 compared to January 2016, they were back on their increasing curve by February (see right).

Normally, the free trade arrangements between New Zealand and China involve much of the import quotas being filled in the first month of the year, so there had been much pessimistic reading of the low January figures.  Wrongly so, as it turns out.

In their March 2017 China Food and Agribusiness monthly report, Rabobank predicts continued increases in dairy imports for 2017, up 20% in liquid milk equivalent for the year.  This is based on their analysis of the relative cost of production and processing of locally produced milk into WMP versus the cost of purchasing imported product (imported product remains cheaper).  It is also based on their assessment of Chinese dairy stocks, which they believe to be at a significant low, so that satisfying even the somewhat decreasing domestic demand will simply require increasing imports.

Source: CLAL

Another interesting development in recent weeks is the emergence of Mexico, a sizeable global dairy importer, as a customer for EU product.  While the country normally supplies its needs from the US, it recently purchased at least 2,000t of SMP from EU traders, with reports of more trade in the pipeline.  Doubtless, the current political climate is helping with this.

Algeria is another major importer, which manages imports through state run tenders.  In January 2017, it purchased over three times the amount of WMP from EU traders which it purchased in its January 2016 tenders – 6,200 t versus under 2,000t last year.  It also bought 50% more SMP, with a purchase of 14,000t which returns it to 2014 and 2015 levels.

The outlook for long term demand growth also remains positive, especially in emerging and populous countries in SE Asia and parts of the Middle East – the latter especially in Iran after the end of the sanctions just over a year ago.

In South East Asia, the example of Vietnam is striking: with a 90m population and an expected 5m increase by 2020, Vietnam is expected to see a 7% annual increase in dairy demand.  Improved incomes, increased urbanisation and greater focus on children’s and the elderly’s care and nutrition are all driving this growth.  But recent domestic production trends suggest self-sufficiency could max out at 38% by 2020 – leaving ample scope and hunger for increased imports.

Geopolitical uncertainties may make for volatile demand

While long term demand trends remain unchallenged – UN/FAO continue to predict an annual growth of around 1.8% per annum, mostly ahead of global production growth – volatility will not be helped by geopolitical turbulence.

The Trump administration’s attitude to trade and immigration has already resulted in Mexico venturing elsewhere for some of its dairy needs.  This has worked out to the advantage of European dairy traders, but measures and policies the US might implement under Trump’s Presidency may be less favourable.

The exit of the UK from the EU is another creator of uncertainty.  Currency movements linked to it have already impacted on the competitiveness of EU imports – including Irish imports –  and food inflation figures have increased in the UK at least partly as a result.  Rising food and fuel prices were the main items which increased February UK inflation from 1.8% in January to 2.3% in February – the highest since September 2013.

Rising inflation is reported to coincide with lower wage growth, squeezing spending power and affecting consumer confidence, which is also unsettled by the uncertainties around what the post Brexit world will look like.

The UK imports 53% of all our cheese exports, 29% of our butter exports, and 12% of our SMP exports.  It is a crucial market, and consumer demand remaining buoyant is vital to allow those sales to continue before the UK is no longer a member of the EU.  Of course, continued access to that market is vital for the Irish dairy sector thereafter too, and we have made important recommendations on how this needs to be achieved in the IFA Brexit Policy Document which you can access here.

Add to this a raft of elections within the EU (Dutch, which returned outgoing PM Mark Rutte instead of the Eurosceptic Geert Wilders as was feared; French with a candidate (Marine Le Pen, Front National) threatening to leave the Euro and possibly the EU if she’s elected; German; Hungarian…) which each have the potential to alter fundamentally the political direction not only of the countries concerned, but also the future of the EU, and you see that geopolitical uncertainty is rife in 2017.

Rabobank Q1 2017 Dairy Quarterly Report

Rabobank expects demand for butterfat to continue to underpin the market and strong prices, but are less optimistic about SMP.  Intervention, both existing stocks and the return to intervention sales, but also currency fluctuations, and output variations will influence that side of dairy markets particularly.

That said, they expect that the return of China to raised levels of dairy imports (+20% year or year) will likely ensure a balanced WMP markets.

They forecast that dairy commodity prices will remain stable at least until the second half of the year.

This is their regional dairy markets round-up:

Source: Rabobank

Meanwhile, EU average dairy prices showed slight uplift last week

While powder prices had been weakening significantly, the EU MMO reported average dairy prices for the week ending 2nd April showed a very slight uplift for almost every product.

Butter did especially well, but then butterfat has performed best of all dairy products in recent months, and EU butter prices had been relatively stable since late last year.  Last week, WMP prices rose €50/t, SMP a meagre €10/t to €1790/t (that’s just under €100 above the intervention buying in price), and whey powder returned to €970/t.

Based on data from: EU MMO

Returns from the Irish product mix, based on the EU averages for 2nd April, would be very marginally up on the previous week’s, at just under 36c/l – so equivalent after processing costs are deducted to a milk price of 31c/l + VAT, or 32.6c/l incl VAT.

Based on data from: EU MMO

CL/IFA/7th April 2017

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