Dairy Market Blog

Dairy Market Blog
16 May 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

As GDT stages 5th bullish auction, could 2017 see further price improvements?

FCStone International predict a March reduction in EU supplies of 0.19% – a narrowing in the gap with previous year’s supplies.  However, during April, a cold and dry spell over Northern Europe subdued the recovery of German, Dutch and French milk supplies, and now the European peak is just behind us.  Also, the herd reduction scheme in the Netherlands will continue to reduce their capacity for this year.

While the gap with last year’s supplies has tightened, it is doing so more slowly than expected, and EU milk output appears unlikely to spill into larger volumes than 2016 until later this year (see global output below).

Intervention stocks of SMP (350,000t) remain an overhanging concern.  Also, while buying-in has resumed, the quantities have been very much more modest than this time last year, totalling 6,554t for 6 week period ending 7th May, versus an average of 15,000t/week at this point in 2016.  Also, SMP processing is down by over 9% in the first two months of 2017 (see graph right), and down by 3.3% in the period from April 16 to end February 2017.  With this trend is continuing, fresh SMP availability is now below demand.  Hence while the high intervention stocks and buying in remain influential in buyers’ assessment, it is clear that shortages of fresh SMP could be an issue later this year.

Dairy commodity prices are firm for butter, whey and cheese, weaker for powders – but in recent weeks in the EU, all dairy prices have increased (see below).

All in all, it seems we have the ingredients for medium term stability, at worst.

Theo Spierings, CEO of Fonterra, in recent days even predicted 3 years of stable milk prices for New Zealand farmers!  That’s a longer horizon than I would consider, as so many things will happen over those three years, not least for us Brexit!

Global output growth about to tip into positive – but EU growth slower

The monthly data dashboard published by the US Dairy Exporters Council (USDEC) shows that March global output is coming much closer to last year’s levels – as a result of continued strong increases in US production (albeit more modest than in February), and NZ output moving from negative to positive territory and rising significantly in that month (by more than 9%) – however it does not take account of the weather effect suffered in New Zealand in April, for which month no statistics are as yet available as we write.

EU production continues below previous year’s levels, at an estimated 0.19% below March 2016.

Dutch milk production are reported down 0.41% for April – a real change in trend for this dynamic dairy producing country, and reflecting some of the impact of the herd reduction scheme.  French milk output for April was down 1.68%, with recent weeks’ production affected by a dry spell.  German collections for the first quarter of 2017 were down 4.43%, with April supplies estimated by FCStone International to be down 3.4% on April 2016.

On the other hand, UK milk output, which was down 1.5% in March 2017 compared to the same month in 2016,  run 1.2% above prior year in the weeks from mid-April.

Italian milk collections are also rising, up 2.61% in March, and 0.88% up for 2017 todate.

Source: USDEC

Milk output estimates March, and Jan to March 2017

Source: FCStone International

GDT – 5th bullish auction in a row today!

The GDT auction today (16th May 2017) belied expectations which, based on mixed to negative futures trades in recent days, suggested a poorer performance from WMP especially.

Butter motored on with a price increase of 11.2% compared to the previous auction, as did AMF, up 8.2% – showing a continued strong performance from butterfat.

1% and 1.3% for SMP and WMP respectively is not huge, but it speaks of buyers’ concerns over availability of the product over the coming months, as flagged above.

This auction’s average SMP and butter prices of US$1998/t and US$5479/t respectively  would return gross (before processing costs) 37.87c/l, or a farm-gate equivalent price of 32.87c/l + VAT (34.64c/l incl VAT) after 5c/l processing costs are deducted.

Milk output in New Zealand could be negatively affected for a second season in 2017/18 (it fell around 3% for the season which is just ending).
Cyclone Cook and Cyclone Debbie have caused significant flooding and infrastructural damage to pasture in the dairy intensive parts of New Zealand’s North Island.  Whether this will impact the 2017/18 season, which starts next month, will depend on how the rest of the New Zealand winter weather pans out.

The longer term prospects of expansion in New Zealand have been cast into doubt by recent statements from the Minister for Primary Industry Nathan Guy, who suggested that the industry would have to rely on increased value rather than volume, as the type of increase in cow numbers of the last 40 years (from 2.9m to 6.5m) could not be sustained from an environmental perspective.

EU dairy commodity prices rising

In the last couple of weeks, all EU average dairy prices reported through the EU Milk Market Observatory have risen, some significantly.  SMP increased €40/t in the most recent two weeks, as did WMP.  Butter in the same period rose by €80/t, Cheddar cheese by €30/t and whey powder by €20/t, reaching €1,000/t for the first time in three years.

Based on: EU MMO data

Dairy returns on the basis of these prices have lifted back up above 36c/l gross (before processing costs are deducted).  A representative Irish product mix would, for the average EU dairy prices for the week ending 7th May 2017, amount to a gross 36.4c/l, equivalent to a farm gate price of 31.4c/l (assuming a 5c/l processing cost), or 33.1c/l including VAT.

Based on: EU MMO data

International price trends also reflect strong butterfat and weak powder

The world market reflects exactly the weaker prices of powders and much stronger price trends for butterfat being experienced in Europe.  Many commentators have remarked on the fact that the price gap between the two was at a record high.

The reason for the high butter prices lie in the much stronger demand both in Europe and the US which is reducing both blocks’ export availability.  Butter consumption in the US has increased by 22% in the last 20 years, benefiting in recent times of the more positive health related messaging around butter consumption.

From the two graphs below, it is interesting to note how SMP and butter prices from the EU, the US and Oceania have converged in recent weeks.

SMP prices in US$ per lb

Source: USDEC

Butter prices in US$ per lb

Source: USDEC

Even more good reasons to remain ambitious for 2017 milk prices

In our May 2017 Dairy and Liquid Milk  Newsletter, we listed 10 good reasons why co-ops should remain ambitious for milk prices in 2017.  The latest dairy market news in this blog, if anything, reinforce that view, so it is worth reminding ourselves of the 10 good reasons, refreshing a few of them along the way:

  1. After an estimated 3% fall in the 2016/17 New Zealand output, the new 2017/18 season to start next month is being questioned as a result of pasture-damaging April storms.
  2. The Netherlands, the most dynamic EU country for milk expansion, are cutting production capacity this year to reduce phosphates. In the largest dairy countries of the EU (France, Germany) supplies remain below last year with milk prices still below production costs.
  3. SMP is again being sold into intervention, but the quantities are modest (6554 t since the end of March). A far cry from over 15,000t/week this time last year!
  4. Fresh EU SMP supplies are down: processing has fallen back on year-earlier since last June, and fell 9.1% for the Jan-Feb 17 period, and down 3.3% for the April 16 to February 17 period. Shortages of fresh EU SMP would help change the perception of intervention stocks.
  5. SMP spot prices, while just above intervention levels at around €1750/t, have increased by €20 to €40/t in the first week of May. EU average SMP prices increased €40/t to €1790/t in the last two weeks.
  6. Average EU butter prices breached €4000/t last October, rising again in recent weeks, to a current EU average of €4390/t.
  7. As well as butter, all the main commodities relevant to the Irish product mix have seen price uplifts in the first week of May, to a milk price equivalent return of 31.40c/l + VAT, or 33.1c/l incl VAT.
  8. Five consecutive strongly positive GDT auction results with price increases for butterfat, WMP, cheese and casein suggest that international buyers are prepared to pay stronger product prices in the second half of the year (graphics above right). 16th May GDT prices for SMP/butter would return a farm gate price of 32.87c/l + VAT or 34.64c/l incl. VAT.
  9. Chinese and SE Asian dairy demand is vibrant. Rabobank reports insufficient domestic production in China with expectations that dairy imports will rise 20% this year.   China prioritises EU origin imports for value-added dairy, especially infant formula, mostly from the Netherlands and Ireland.  Those rose 19% in the first quarter of 2017.  Vietnam, a populous country of 90m,  70% reliant on imports for its dairy supplies, is predicted to grow demand 7% per annum. Meanwhile, imports of EU cheese into Japan have increased 44% in Jan-Feb 17, while South Korea’s have risen by 39%.
  10. In South America, supplies fell 12.5% in Argentina (2016); by 1.8% in Uruguay (Jan-Feb 2017); 3.68% in Brazil (2016) with only Chile showing a small positive (+0.7% Jan-Feb). Those countries are now significant importers of dairy, just like Mexico, with domestic supplies well below demand.


Volatility is at play, but in the medium term, the factors above could actually promote improvements in powder prices in particular.  Co-ops must bear those in mind in making the milk price decisions which will determine the most important milk cheques of 2017.




CL/IFA/16th May 2017

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