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30 Jun 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Butter shortages send prices to unprecedented levels

EU butter production has fallen 5.3 % for the first four months of 2017, and by 3.3% for the 12 month period to April 2017, creating a situation of shortages which is leading to huge price increases, with spot prices this week exceeding €6,000/t (see further in blog).

SMP production, meanwhile, has actually fallen back even more (-9.7% for the first 4 months of this year, and -6.4% for the 12 months to the end of April), but the price impact has been far more modest, largely due to the overhanging 350,000t of SMP in intervention.

Milk deliveries in the EU have been a mixed picture, with Ireland, Poland and more recently the UK continuing on the expansionary trend, while larger countries like Germany and France producing considerably less than in the same period last year.  The upshot is a 1.5% fall in EU milk collections for the first four months of the year, and a 1.9% fall for the 12 months to April 2017.

Source: EU MMO

EU dairy market returns continue to rise

While butter prices have continued to rise almost uninterrupted for the past 12 months, now exceeding €5,200/t, other product prices have also improved, some considerably, in the last period especially.  WMP prices now exceed €3,000 per tonne, and Cheddar cheese has also improved, to over €3,500/t.

Most remarkable is the recovery in product prices over the last 12 months, as outlined in the table below, with butter prices lifting by a whopping 82%, WMP by a more modest 40%, Cheddar by 33%, whey powder by 56%, and SMP, limited by intervention stocks despite shortages of fresh manufacture, has nonetheless seen price increases of 14% from what was, in June 2016, no more than intervention buy-in price level.

Based on EU MMO data

In the most recent period, the price of butter has been rising very sharply, but the SMP price has dipped ever so slightly in the last week, more than likely as a response to the EU Commission’s acceptance of bids to buy 100t of SMP from intervention stock at €1850 (about €150/t below the average market rate).  COPA, with IFA’s strong support, have written to EU Commissioner Hogan to urge him and his market management team to accept only future bids at or above the market rate.

Based on EU MMO data

Returns reflect stronger prices

WMP, Cheddar as well as butter have all marked price increases in the most recent week (w/e 26/06/2017).  SMP is slightly down, as is whey powder.

However, overall returns for an Irish product mix, based on the EU average prices for those products, have continued on their upward trend, in view of the high importance of cheddar and butter in the mix.  Gross returns before processing costs now are at 40.03c/l, which after deduction of 5c/l processing costs would yield a farm gate price of 35c/l + VAT, or 36.9c/l incl VAT.

Based on EU MMO data

Spot prices: Butter breaks €6,000/t, but SMP eases

Latest (28th June) spot prices for Germany, France and the Netherlands show a continued massive increase in butter prices, up around €300/t in the last week alone, and breaching the €6,000/t line.

The spot prices are very different from the average market price: while the latter are representative of what products are really traded at on the specific date, the spots are the price at which product is available immediately, outside of any contractual arrangements.  They are revealing of trends rather than actual price levels, and where spots go, average market prices and contracted prices eventually follow.

While the price increases are revealing of the very real shortages of butterfat at the moment, many in the industry are highlighting just how difficult it is proving to translate those big wholesale price increases into the food chain.  Put simply, retailers are reluctant to increase the retail price of butter packets, and meanwhile, the intermediary margins get squeezed.

Source: FCStone international

Market trends also positive elsewhere

The second GDT auction for June, while showing an overall slight decrease of 0.8% caused by the 3.3% downwards adjustment in WMP prices, nonetheless saw continued strong price uplifts for butterfat (AMF + 4.4% and butter +2.9%) and SMP (+1.4%).  While some of the other product prices showed some reduction, the volumes traded are very small by comparison with the other, more influential products.

Source: GDT

The returns for SMP/butter, based on the latest GDT prices, and bearing in mind both the US $ exchange rate and the Irish 3.3% protein and 3.6% butterfat standard, would be around 39.7c/l before processing costs, or assuming our usual 5c/l processing cost, 34.7c/l + VAT (36.6c/l incl VAT), farm gate equivalent price.

The next auction will take place next Tuesday 4th July, and volumes offered match forecasts – this means there should not be any surprise for buyers.

Global output rising more slowly than expected

Global output has been catching up with last year’s levels from Feb /Mar 2017 or so, but the growth has been significantly slower than expected, especially in the last few months – largely because of the lower production in some of the major EU countries.

Source: USDEC

Rabobank Q2 Dairy Quarterly report states “Optimism rising faster than supply”

The Q2 Rabobank 2017 Dairy report highlighted the slower than expected pace of global milk production recovery.  It predicted that New Zealand would have a strong new season start, due to higher milk prices and relatively low production in the same period last year (which would make new season figures look strong by comparison).

Rabobank also predicted that China would increase second half imports despite higher product prices, because it is running out of stock and domestic production growth is slow.  China’s increased buying activity, combined with strong demand from developed countries, would help reduce surpluses and maintain strong dairy prices for the rest of the year.

Their regional analysis is summed up in the table below:

Source: Rabobank

Outlook positive for further milk price increases

The current market situation and outlook clearly suggest that for the medium term, with some variation between commodities, dairy markets will likely continue to return reasonably strong prices, and therefore justify further milk price increases for Irish farmers as well as their European colleagues.

In France, French milk purchasers are all coming under pressure to commit to paying 34c/l for the summer, and many have already agreed to do so, with retailers accepting in a very public way to support them with the corresponding wholesale price increases.

Friesland Campina have announced a 0.5c/kg July price increase to 37.25c/kg (before VAT) – see graph below.

Source: Friesland Campina

Co-op boards will be meeting over the next couple of weeks to decide on the June milk price, and June is for most farmers their biggest milk production month – especially this year, which has seen a 7.3% increase in May production, and will probably see some further increase in June.  These are the two peak months which go towards paying most of the bills and financial commitments.

The justification for price increases is not in question – and co-op board members should come to the same conclusion.

CL/IFA/30th June, 2017  

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