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07 Jun 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

6th consecutive positive GDT auction sees continued butter/SMP recovery

In an encouraging SMP prices have continued to recover in this week’s GDT auction, increasing by nearly 8% over the previous event.

Butter prices, which have been on the up for the last few months, also continued to push upwards, with a 3.3% increase over the average price reached at the previous auction.

Taking the new increased SMP and butter prices, we calculate a farm gate price equivalent at Irish constituents of 34.05c/l + VAT (35.9c/l incl VAT).

WMP prices eased, with a 2.9% decrease over previous event.  This new reduced price would yield an Irish milk price equivalent of around 29c/l + VAT (30.5c/l incl VAT).

The downturn in the WMP price is what kept the overall average price index increase as low as 0.6%, because by very far the largest quantities of product traded through the auction is always WMP, followed by SMP.

Source: GDT

Ornua PPI reflects improved butter returns into May

The Ornua PPI increased 1.8 points for May trade, to 106.8 points, equivalent according to Ornua to a milk price before VAT of 30.36c/l (32c/l incl VAT), after deduction of their 6.5c/l processing cost estimate.

This reflects improved butter returns during the last month, and seen as SMP prices have also been improving, it is not unreasonable to expect that those may be reflected later on.

Source: Ornua

SMP intervention less of a factor?

The strong increase in GDT SMP price is also reflected in EU average and spot prices.  This is despite the fact that 350,000t of EU intervention SMP continues to overhang the market.  The Commission’s determination not to sell below market price has meant only 40t were ever sold, back last December!  This has clearly paid dividends, as average EU prices are now close on €200/t above intervention buying in levels (see below)

We saw a return to modest levels of buying in from late March , with 7,900 t bought in between 27th March and 21st May.  Few countries were involved: Lithuania, the Netherlands, Germany, the UK and Poland.  This compares with up to 15,000t per week at peak this time last year!

Also, the last week of May saw an end to intervention buying in, as prices continue to recover.

EU dairy prices continue to rise

At €4,850/t for the week ending 28th May 2017, Average EU butter prices have increased massively to historical highs unprecedented in the EU MMO archive of average EU prices, which starts in 2001.

For the last few weeks, the EU MMO has been reporting steadily increasing prices for all the main commodities, as per the graph on the right.

While butter prices have been strong for several months by now, powders had been slow to pick up.  However, both SMP and WMP have improved significantly since late April – by +7.4% and +6.6% respectively.

Overall, the returns from average dairy product prices as reported to the EU MMO as at week ending 28th May would, for a representative Irish product mix, yield a gross 38.52c/l, or allowing for a 5c/l processing cost deduction, a milk price equivalent of 33.52c/l + VAT (35.33c/l incl VAT).

Based on EU MMO data

EU production rising – but relatively slowly as we pass peak

EU milk production has been rising: while remaining below last year’s levels still, the gap has been narrowing.  The January to March period saw a decrease of 2.3% overall, and FCStone International estimate that April EU output, overall, will be down only 0.1% in April.

Source: EU MMO

More recent trends suggest that higher temperatures than average and moisture deficits in April and some of May have affected output in Northern Spain, France, Germany,  the UK and the Netherlands – at least.

Spain, which was down 0.29% for the Jan-Apr period scored a 2.3% increase in April.  France is back 4.17% for the year todate, with a March decrease of 1.24%, and a 4.5% downturn in the 3rd week of May.  The same week in Germany saw a decrease of 3.7% (Germany is now past their peak).  April output in the UK saw no change compared to April 2016, but with a positive (+4.1%) for Northern Ireland and a small negative (-0.8%) for Great Britain.  Belgium, which had increased production significantly in 2015/16, is now well down, by 2.22% for April.   Relative to its milk output, Belgium was one of the largest contributors of SMP into intervention in the last year.

Poland, also a very dynamic milk producer in the post quota era, increased April production by 4.1% year on year, by 7% on a 3-year average, and 12% on a 5 year average.  Production for the first four months of 2017 was up 3.63%.

The lower milk output is naturally being reflected in lower tonnages of certain products being processed, especially SMP (-9% for Jan-Mar 17 compared to 16, and 3.9% down for the full year April 16 to March 17) and butter (-4% for first quarter and -1.5% for the full year) – both of which are undoubtedly impacting price levels.

Source: EU MMO

What outlook for milk prices?

In recent weeks, there have been reports of European processors reducing prices somewhat.  This is in the context of weaker dairy commodity prices in February/March, and milk price decisions being made in most countries for the month(s) ahead, not in retrospect as is the case (uniquely) in Ireland.

Arla cut their April price by 1c/l, though Arla UK held for April and reduced their May price by 0.8ppl, Mueller also cut their May milk price – both causing much anger among UK dairy farmers.

Since March/April, however, as we have shown above, volumes of milk have been relatively slow to build, the determination of the EU Commission not to undersell intervention SMP has been well and truly proven, and strong demand in developed and emerging countries, especially for butterfat and cream, has sustained further commodity price improvements.

Fonterra have not only increased their final forecast price for 2016/17 to NZ$6.15/kg MS, but have also announced a higher initial 2017/18 forecast of NZ$6.50/kg MS.

The outlook for milk prices in the early summer is positive.  We have demonstrated that there is scope for further increases, and IFA has been urging co-ops to lift the May milk price by up to 2c/l.

With a current (April) milk price averaging 30c/l (at 3.3% protein and 3.6% butterfat, not including VAT and based on the heavily West Cork influenced Farmers’ Journal League average), we contend that 32c/l + VAT (33.7c/l incl VAT) is fully justified as a new average for May milk!

 

CL/IFA/7th June, 2017

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