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17 Jul 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Dairy Market Blog – Monday 17th July 2017

World production eases in May

Milk output from the five main global exporting regions fell back dramatically in May, mainly as a result of lower EU output.  French milk production was down 2.9% in May, German output back 2.45% for May, Dutch production was back 0.4% for the month of June, and down 0.52% for the first half of 2017.  This was less of a decrease than expected in light of the herd reduction scheme, but the scheme did allow farmers to outsource the rearing of younger stock, which may have allowed many farmers to actually maintain production.  Of course, it remains to be seen whether the scheme has reached its aims regarding the nitrates/phosphates limits, and whether it will be deemed sufficient effort by the EU Commission.
Danish milk collections were down by 0.7% in May, and a further 2.8% in June.

In positive territory were Italy (+), the UK (+0.58% for June)

Elsewhere, NZ production was back 0.7% for May, -1.1% for the season to May, and US growth was slightly more modest than previous or predicted.  (+1.8% for May).

Source: USDEC

How much further for butter prices?

Butter prices have continued to shoot up, now exceeding €6,200/t on average for German, French and Dutch spots (see table right).  On the other hand, SMP has continued to ease, with spots now averaging just over €1,800/t.  Whey spots are also easing.

Source: FCStone International

EU average market prices, as reported by the EU MMO based on national official reports to week ending 9th July, do reflect the trends set by the spot quotes.

EU average butter prices have continued to rise very significantly, reaching €5,610/tonne, cheeses are also continuing to firm, with Emmental at €4,470/t, Gouda €3,310/t, and Edam up at €3,370/t.  Cheddar is unchanged in the last couple of weeks at €3,590 to €3,600/t.  WMP is a little easier just below €3,000/t while whey powder is well down at €930/t.  SMP prices continue to be pressured by the overhanging intervention stock, which remains at 350,000t after only 140t were sold since late 2016.  The 100t sold most recently was priced at €1,850/t, which on the one hand showed that buyers would pay more than the very low prices they had bid in earlier weeks, but on the other hand was about €150/t below the market price at that time.  It seems that decision did contribute to weakening the SMP market price, and it will be important for the EU Commission to accept higher offers in future.

It is important to note, however, that, compared to 12 months ago, EU dairy commodity prices have strengthened very significantly, with butter 88% higher, cheeses up by between 23% and 42% (Cheddar cheese up 37.5%), WMP by 36% and whey powder by 49%.  SMP had recovered further, but latest price is about 9.5% higher than 12 months ago.

Returns from EU average product prices, expressed for a representative Irish product mix, are being carried by butter, as many of the other product returns are slightly easier.
Gross returns for 9th July prices reached 40.6c/l before deduction of a 5 c/l notional processing cost.  This would be equivalent to a farm gate price of 35.6c/l + VAT.

Source: EU MMO

Irish commodity prices below EU averages

Average EU dairy commodity prices hide a big variation, as can be seen from the two graphs on the right.
The Irish average reported prices are currently below the EU average for both SMP and butter.  The EU Milk Market Observatory doesn’t publish prices for all commodities, nor for all countries.

So, using the current (9th July) Irish reported price for SMP and butter, and the EU average for the other commodities, the gross return before processing costs would be 39.4c/l.

This would be equivalent to a farm gate price of 34.4c/l + VAT.

It should be noted that average market prices reported to the EU MMO do not necessarily equate to the average returns being obtained by individual processors at any point in time – because most processors would have a combination of spot and forward contracts, some at higher, some at lower prices, depending on product and timing/duration of the contracts.  They are however a good indication of market evolution, and closer to current reality than spots.

Source: EU MMO

The Ornua PPI (below right), on the other hand, shows the returns from the balance of products traded by Ornua on behalf of its members in the month for which it is published.  The June PPI increased to 110.0 points, its highest level since August/September 2014 – when the embargo on EU food product imports was first introduced by Russia!  The June Ornua PPI is equivalent to a farm gate price of 31.3c/l + VAT – about what the main milk purchasers are paying for June milk.

Source: Ornua

GDT – will we see continued recovery in WMP price?

The second GDT auction for July is due tomorrow 18th July 2017.  Like the first auction, it will deal with trade for monthly contracts from August 2017 to January 2018 inclusive.  Volumes on offer are no different from volumes forecast, so there should not be any surprise factor for buyers.  The NZX futures for WMP are slightly up for contracts in August to October, butter unchanged, and SMP easier to stable for the period.

It is very difficult to predict accurately the result of the auction, except that it is strongly influenced by WMP, which remains to this day the main product traded through GDT in volume terms.

Source: GDT

Demand: lower growth, but dairy demand still to be among strongest in next decade predicts OECD/FAO

While the FAO/OECD experts have revised down their economic and food commodity prospects for the 2017-2026 period, they note that dairy will be the exception.  They expect demand for commodities, including non-food uses, to slow compared to the previous decade, with growth rates halved for cereals, meat, fish and vegetable oil.

Dairy products, especially fresh dairy products, are a major exception to this trend – mostly due to major per capita increases in developing countries, especially India.

Growth in global consumption of processed dairy products is expected to be slightly slower than in the previous decade, at 1.7% per annum.  The FAO Outlook report however acknowledges the renewed interest in consumption of dairy fat in developed countries, supported by consumer preferences shifting towards healthy diets, and the more positive health assessment of dairy fats.

FAO therefore predicts that consumption per head with grow across all processed dairy products in developed countries, so that dairy will have among the highest growth rates of agricultural commodities.  Income and population growth will both contribute to rising demand.

Chinese imports to grow further in second half

Imports of infant milk formula by China have increased substantially in the 5 months to May, in both value and volume.  SMP volumes are also up by 12%, with value at +30% reflecting stronger product prices.

Cheese imports are also well up, reflecting the greater prevalence of fast food outlet (pizza, burgers…) where cheese is used as an ingredient.  Packed and bulk milk imports are back, both in value and volume.
Rabobank continue to predict stronger imports for the second half of the year, as China struggles with falling stocks and insufficient domestic production.

Source: CLAL

Milk prices – LTO 2016 report and FJ/KPMG Review

They may be historical, but it is worth spending a little time analysing the LTO report on 2016 EU milk prices and the Farmers’ Journal/KPMG Irish milk price review.

LTO, the Dutch farming organisation, keeps a European and global milk price league, updated each month.  It is not an average price paid in each country, but rather the price recorded from 2 or 3 suppliers to a handful of milk purchasers in most EU member states.   It measures prices based on 3.4% protein, 4.2% protein, a 500,000kgs supply, an SCC less than 250,000 and TBC under 25,000.  Prices are also net of VAT.
In Ireland, suppliers to Kerry and Glanbia have participated of old, and more recently, also Dairygold.  The LTO 2016 report shows the average price monitored in this manner for each of the last 8 years.  It does show Irish milk prices – or at least those paid by the three milk purchasers monitored – are poorly placed relative to other EU milk purchasers.  The €28.30/100kgs average for 2016 is €4.15/kg below the average of the three Irish milk purchasers, who together with Dutch DOC Cheese,
bring up the rear of the LTO league.
It is also worth noting that the gap between the average and the Irish milk purchasers’ price is at its widest in bad years (e.g. 2009, 2016).

Source: LTO Netherlands

Quite apart from the relatively poor performance on the European stage shown by the LTO league, the 2016 Farmers’ Journal/KPMG review has also shown a dramatic widening in the gap between best and worst payer over the last 13 years, to a historical high of 6.15c/l in the last year.

Of course, differences in the average constituents produced by farmers come into this difference, as do the fact that some milk purchasers have more access to alternative income streams they can use to top up milk prices.  Neither of these factors can explain all of the gap, nor the fact that it has been widening over the years.

It is important that all co-ops would carefully consider the way in which they pay for milk, their processing and marketing efficiencies, the opportunities to share costs with other processors, their product mixes, the degree to which they benefit – or not – from trading through Ornua versus trading directly, etc.

Farmers have made a solid long term commitment to the Sustainable Dairy Assurance Scheme at a significant cost to themselves.  Co-ops must ensure that they all leverage the unique selling point of our measured sustainability into better markets and product mixes to give farmers equal opportunities to better milk prices regardless of where they produce milk.

 

Based on: FJ/KPMG Milk Price Review 2016

CL/IFA/17th July 2017

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