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03 Aug 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk, Prices

Downward EU production trend set to continue

With the EU Milk Market Observatory still stuck on the May figures, Rice Dairy International, a US based dairy risk management consultancy firm,  have extrapolated the fresher statistics available from France, Germany and the UK, which between them represent 47% of total EU production, and come to the conclusion that the slower trend would continue into June and July.

All three countries are down 2.43% for the year todate.  Extrapolating from their most recent weekly data, the Rice Dairy model predicts June EU supplies should be down 1.43%, and July supplies (based on only 2 weeks’ data) down by a further 2.33%.

Source: Rice Dairy International

Analysts from Rice Dairy present these figures in detail in the video here: https://www.youtube.com/watch?v=RrGz1FnObfg&feature=youtu.be

In the Netherlands, the impact of the herd reduction scheme is continuing to be felt into May, albeit in a limited way.  Output is back 0.58% on the same month last year.

Some countries run against this trend however, not least Ireland.

June Irish milk supplies were up 6.1%, with supplies for the year to June up 6.6%, as reported by CSO (see right).

In Poland, output for the year to the end of May was 3.5% higher.

Source: CSO

Global output trends a more complex picture

In the US, third quarter milk supplies were up 2.09%, however, the forecast for the fourth quarter is for similar growth.  The annual volume forecast has been revised slightly downwards between June and July, however, from +2.02% to +1.83%.

In New Zealand, the May supplies in tonnes of milk were down by 0.73%.  Production for January to May 2017 was up by 2%, but because of lower output trends in 2016, the 16/17 season is believed to be closing 1.1% below the 15/16 season.  Reports from the new season, starting June/July suggest that while higher prices have improved confidence, the wild and wet weather experienced in recent weeks has caused its own difficulties.

A confidence survey by Federated farmers of New Zealand suggests stronger optimism, with 1/3 of farmers expecting production to increase on their farms in the new season.  The proportion of farms making a profit has doubled to 55.4%.

Dairy prices: gap between butter and SMP continues to grow

Whether on global or EU markets, butter prices are continuing to rise in reflection of tight stocks and shortages of fresh product, while SMP prices weaken under the influence of the 350,000t remaining in intervention.

Analysts commenting on this week’s GDT auction, which saw a 1.6% downturn, have expressed no surprise at the 4.9% slippage in butter prices.  Some of them even expect to see a return to butter price increases because of the very severe shortages.

ASB economist Nathan Penny said prices were consistent with its forecast $6.75kg/MS for the 2017-18 season.

“Taking a step back, it’s not altogether surprising that milk fat prices took a breather, given the price explosion over recent months. Butter prices, for example, have surged over 35 per cent this year, while anhydrous milkfat prices have lifted a more modest, but still robust, 18 per cent. Both butter and AMF have set multiple auction record highs over 2017.”

“However, we suspect that the slowdown in milk fat prices may be temporary.  Demand continues to surge and inventories are now very tight. As supply struggles to keep up, we expect that any further lift in milk fat prices will lift dairy prices more generally. Such a lift would break WMP prices out of their holding pattern of recent months,” Penny said.

Source: GDT

European dairy prices as reported by the EU MMO have shown a continuation of the butter price increases, and of the SMP slippage.

Butter prices for the week ending 23rd July (the most recent available figure as we write) had increase to €5770/t on average across the EU, albeit with significant differences from country to country.

Hence, the Irish butter price was at a significant discount from that for the same week, at €5190/t.  SMP prices were closer, with the EU average at €1810/t and the Irish at €1790.

In recent weeks, butter price increases have somewhat made up for the weakening of other products, not least SMP and whey powder.  Returns on the basis of a representative Irish product mix have hovered around 40-41c/l gross, so equivalent to a farm gate milk price of 35c/l + VAT.

Factoring in the lower Irish reported prices for SMP/butter, and using the EU averages for the other elements of the product mix (because the EU MMO doesn’t publish individual country prices for those), those gross returns are slightly lower at around 39c/l before deduction of 5c/l processing costs or 34c/l + VAT as a farm gate equivalent.

 

Based on EU MMO data

Spot prices: some firming of SMP this week

Sport prices reported this week by FCStone international are showing a continued uplift in butter prices in Germany and the Netherland, with stable levels in France.  Average butter sports are reported up to €6300/t.

Even more interesting is a slight pick up in SMP prices in Germany and France, and stable levels in the Netherlands, when SMP spots had been weakening significantly in recent weeks.

Source: FCStone International

Milk spots: the rise continues

Spot milk price in the NW of France (Brittany, Normandy and the Pays de Loire, the most dynamic milk production regions in France) was up to 37c/l.

The Dutch and Italian spot prices reported by the EU MMO have also increased further, to €40.5/100kgs and €43/100 kgs respectively.

Source: Groupe France Agricole

Source: EU MMO

Farm gate milk prices: European competitors are continuing to benefit from stronger returns

European milk purchasers have been increasing July and August milk prices, with Friesland Campina the most recent to announce a 1.5c/kg increase to its August milk price to 38.5c/kg (graph right)
In Irish constituents, this would be equivalent to 32.7c/l + VAT (34.5c/l incl VAT).

Largest French milk purchaser Lactalis, a private company, have announced an August milk price of 35.1c/l, with an expectation of 36c/l for September.

Arla have increased their August milk price by 1 c/kg, which translated into an Arla UK price increase amounts to 0.89ppl.  This takes the standard litre price to 29.98ppl (33.31c/l at current exchange rate).

Source: Friesland Campina

Milk prices – scope for further increases to ensure Irish farmers keep up with EU competitors

Based on the May Farmers Journal Milk Price League, we predict the soon to be published June League will show an average price paid by Irish co-ops of  31.9c/l + VAT (33.62c/l incl VAT).

The graph below tracks the prolonged period of challenging milk prices which has been experienced by Irish dairy farmers.  Since the trough of exactly 12 months ago, prices have substantially recovered by an average of 9.4c/l.  However, they remain below the highest prices seen by farmers in 2014.

*June 2017 – IFA estimate based on FJ May milk price league

Current market returns and the positive outlook for the coming months, underpinned by lower than expected milk output, especially in the EU, would suggest that further milk price increases are both justified and realistic.

Teagasc’s expectations of significant dairy income improvements this year are no surprise with higher volume, good grass growing conditions, a relatively benign cost environment and recovering milk prices.  However, this comes after a prolonged period of low prices and cash flow stresses, which farmers are only catching up with now.  See our press release on this here: bit.ly/2v1wCic

IFA urges co-op board members, when they meet in the coming days to decide on their July milk price, to increase it by a minimum of 1c/l.

 

CL/IFA/3rd August 2017

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