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13 Oct 2017

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk, Prices

Milk output in EU and US now rising in response to higher milk prices

Global milk output has been increasing in earnest, estimated to be currently up 0.7% year on year.

In Europe, where supplies had been subdued in the most influential countries, the trend is changing in recent months and August supplies for EU 28 are estimated to be up 1.8%.  For that month, Ireland’s output was up 11.1%, Denmark up 8.6%, Poland up 5% and Spain up 1.6%.  An FCStone estimated figure for UK September output suggests a 2.7% increase (it was +2.4% for August).  Even France and Germany are now seeing a recovery after months of languishing behind last year’s levels, with +0.5% and +1.5% increases in August output respectively.

The Netherlands, on the other hand, showed the impact of the phosphates-related herd reduction scheme, with an output decrease for August of around 2%, and a 30% increase in cow culls in the first half of 2017.

US August production continued on its upward trend at + 2.1%.

In New Zealand, the early part of the season has been marred by an overly wet spring.  August supplies were back 1.5%, and this is after a decrease of over 1% for the 2016/17 season.

Source: DCANZ

Apart from the higher milk prices, stronger supplies are encouraged by lower global feed and fertiliser prices, good EU weather conditions in late summer/early autumn, and increasing per cow yields compensating for the stable global herd size.

Stocks of butter in the US are high, but falling for the last 5 months, while SMP stocks in the EU continue to overhang the market (see below).

Butter prices past peak

While butter prices remain historically high, they have undoubtedly passed peak, and look set to ease further in coming weeks as milk and butterfat supplies become more plentiful.  However, in Oceania and Europe, prices remain at historical highs, and continue to underpin strong milk prices.

EU spot prices this week (11/10/17) continued at above €6,400/t though this was a drop of €275/t in the week alone.

In their Q3 Quarterly Dairy Report, Rabobank state that “more concrete signs of sustained supply growth from major exporters mean that global prices have peaked in the current cycle”.

Source: CLAL

Concerns over SMP intervention

Intervention buying in for SMP closed at the end of September, and led to further weaknesses in the market price for SMP.  Stock officially now stands at 380,000t, though adding up all SMP bought in in 2015, 16 and 17, and bearing in mind that only 140t have actually been sold out, the amount of SMP bought in is closer to 405,000t – a major overhang which has dampened SMP prices despite there being nearly 10% less of it made in the EU!

In addition, declared intent by the EU Commission to sell product, including some rumours that they may consider not applying the usual reserve to the sale tenders – thus with the prospect that product may be available at less than intervention buying in price – have sent a damaging signal to buyers, who are now holding back in expectation of lower prices.

However, the EU Commission has not formally decided to sell without reserve, and doing so would likely be politically unacceptable, as well as run foul of their stated aim to dispose of SMP without market disturbance.  As we have stated many times here, rumours and perceptions feed market sentiment at least as much as fact, and can have just as dramatic an impact on prices.

Source: CLAL

EU returns continue to be buoyed by butter

The EU MMO reports an average butter price for 1st October 2017 a little easier than previous weeks at €6,340/t, but still at a historically high level.

SMP has been below intervention buying in for a number of weeks now and cheese (cheddar here) has been holding its own.

Based on EU MMO data

As a result, the combination of products which makes up the Irish portfolio would return only very slightly less than the 41c/l gross we have seen through much of September, at 40.70c/l before processing costs – a milk price equivalent after deduction of 5c/l processing costs of 35.7c/l + VAT.

Using the prices quoted for Irish SMP (slightly higher than the EU average) and butter (lower) in the same calculation shows an only very slightly lower gross return of 40.42c/l before processing costs.

Based on EU MMO data

Closer to home, the Ornua PPI has lifted a massive 3.3 points for September trade, to 114.3 points, equivalent to a milk price of 34.7c/l incl VAT.  As some of the international trends apply to Irish prices with some lag, we may yet see some further slight uplifts in the Ornua PPI over the next couple of months.

Source: Ornua

Demand – quite a lot of positive factors, but some headwinds

There are many factors favouring demand in the global economy:

  • Global economic trends are positive, with a return to growth
  • The Euro is expected to weaken against the US $ (good for export competitiveness)
  • It is expected (and indeed already has, somewhat) to stabilise against Sterling
  • Some increase in crude oil prices mean increased revenue in many countries which are dairy customers
  • Chinese demand has increased very substantially, by 28.7% in volume and 70% in value for August alone. Rabobank predict that the positive growth in Chinese imports will continue into 2018.

Source: CLAL

But there are also some headwinds:

  • The UK economy is slowing with the uncertainty of the Brexit negotiations, and consumer inflation is up while wage growth is not keeping pace
  • Geopolitical uncertainty related to North Korea risks destabilising the global economy
  • Retail demand in Europe is marking a beat: consumers are proving resistant to high butter prices

Milk prices – international price lifts continue

Many European dairy farmers have continued to benefit from milk price lifts for September and October supplies, on the strength of good overall market returns underpinned by butterfat and cheese.

Friesland Campina have increased their October milk price by 1.25c/kg to 41.75c/kg.  Arla have increased theirs by 1c/kg which in the UK, with currency and other factors included, translated into a 1.5ppl price increase to 32.3ppl.

In Germany, the IFE institute’s calculated farm gate price equivalent for August (based on SMP/butter only) has risen further to 40.8c/kg.

Are Irish co-ops being too cautious?

In Ireland, co-ops pay in retrospect: the price decided this month for last month’s milk supply.

And the two board decisions which have been made as we write show signs that, at least those two co-ops have become more worried and cautious – hence Glanbia held their September milk price – though this is after having paid a 1cpl bonus on all first half supplies – and Lakeland only gave a 1c/l “butter bonus” for September supplies only.

Will other co-ops show a little more ambition?

 

CL/IFA/13th October, 2017

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