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20 Aug 2014

Dairy Market Blog

Dairy

Russian ban – an unfortunately timed addition to already unstable markets

Announced on 8th August, the Russian ban on EU imports of foods (including dairy) cannot be blamed for July milk price adjustments, but it affects sentiment at a time when markets are weaker due to supply growth (+4.9%) continuing to outpace otherwise good demand growth (+2.5%).

Russia is a very important market for the EU, accounting for 33% of all EU cheese exports, and 29% of all butter exports.   It should be noted that the ban does not involve infant formulae and casein – a plus for the Irish industry. Ireland only accounts for only 0.5% of the cheese exported from the EU to Russia, at around 1,300t last year. Our total agrifood exports to Russia is only 2% of the EU’s total in value terms.

Ireland may not be directly exposed, but the ban may contribute to destabilise global markets. Those countries unable to trade dairy products as normal to Russia (Netherlands, Germany, Lithuania, Finland, Poland…) will look for alternative markets, which may displace exports in other places, and may affect prices. The ban may create opportunities for exporters in countries unaffected by the ban – New Zealand, Switzerland and South America have been mentioned –will this create a price inflation? It has also been stated that EU exports could continue to be channelled to Russian consumers via the countries in the Russian sphere of influence. There is also some evidence that Russian dairy producers are upping their output to supply the market with “copycat” products. However, substitution is not so easy and domestic quality is a real issue.   While the ban has been announced for one year, its political nature means that it could be shorter or longer. Public opinion in Russia is reported to be patriotically in favour of the ban, but there is some evidence of locally produced food prices rising, and this may test that support. It is simply impossible at this stage to assess what the full impact of the ban might be.

More info on the EU trade of dairy products to Russia and the makeup of Russian dairy imports at http://ec.europa.eu/agriculture/milk-market-observatory/pdf/russia-ban-dairy-ppt.pdf

EU commodity prices, though easing further, justify current prices – as does the IDB PPI

The ban has affected market sentiment, and EU dairy commodity prices continued to ease:

EU Commodity prices 10th Aug 2014

EU commodities continue however to return gross prices around 40-41c/l (see tables below), which would justify producer prices into August of 35 to 36c/l + VAT (that is 36.75 to 37.8c/l incl. VAT).

Returns EU 10th Aug

Returns Irish 10th Aug

IDB PPI for July – 118.1 points

Another indicator of July milk prices is the IDB PPI index. While it fell a couple of points more than was expected, at 118.1 points, it still justifies the payment of a price 18.1% above its 2010 base, i.e. 34.6 c/l + VAT or 36.33c/l incl. VAT – just a little over 1c/l more than the price announced by Glanbia for July milk (35c/l incl. VAT).

IDB index July

As we write, Glanbia, Kerry, Lakeland, Town of Monaghan and Arrabawn have cut their July milk price by between 1 and 2c/l. Aurivo, in contrast, have held at their June level of 34.21c/l + VAT (35.92c/l incl VAT).

Now that the peak is well and truly behind us, and bearing in mind that many farmers will need to put the brake on to minimise superlevy, it should be possible for co-ops to stabilise their pricing plans and clarify their intention to hold prices for the rest of 2014.

Short term market indicators more influenced by negative sentiment

It should come as no surprise that spot quotes have shown stronger reactions to the Russian ban, as well as other weakening market indicators of the last couple of weeks ( GDT auctions especially). It’s in the nature of spot quotes to fluctuate more wildly than real market prices in response to actual events or sentiment.

Hence, the Dutch spot quotes for SMP fell last week from €2570/t to €2400/t, while Dutch spot butter quotes went from €3420 to €3350/t. Cheese quotes were relatively unchanged as of a week ago.

GDT

19th August GDT auction results show a relatively neutral average price move, down 0.6%. This reflects strong increases in butterfat prices (butter +4.9% and AMF +3.6%) and WMP price (+3.4%). SMP prices were more disappointing, down 12% – however, the prices for later delivery (Feb 15) were nearly $300 or 10% higher than those for earlier delivery (Oct 14).

Despite the Russian ban, it seems international buyers recognised that dairy prices had reached unsustainable levels, and were prepared to pay more for butterfat and WMP in particular – and those are the products traded in largest quantities through the GDT platform.

GDT auction 1 - 19th Aug

GDT auction 2 - 19th Aug

July milk price and outlook?

Glanbia, Kerry, Dairygold and Carbery all cut their July price by 2c/l. Arrabawn and Lakeland cut by 1c/l, and Town of Monaghan also cut their price by between 1 and 2c/l (not clarified at time of writing). In contrast, Aurivo held their July milk price. The average price paid for July we estimate to be at around 33.5c/l + VAT (35.2c/l incl VAT).

While the Russian ban is creating some uncertainty, it is by no means certain that its fallout will be entirely negative for global dairy markets. Dairy products will have to be found to replace those the EU was selling, and those can only originate from the non-banned dairy regions, or from increased domestic production (and this is difficult to deliver in the short term, both quantitatively and qualitatively).

Buyers appear to be reacting positively to lower priced products (as evidenced in the GDT auction) and more affordable products will encourage greater buying activity, as end of year needs must be filled. In effect, it is not unreasonable to think that we may have reached the low point for global dairy markets, and that prices may stabilise and increase from this.

We would still be hopeful that, now that peak is behind us, and bearing in mind the likely pull back in production to minimise superlevy, it ought to be possible for co-ops to sustain milk prices at current levels, hopefully at least for the rest of the year.

Assuming that this is the case, our estimate of the weighted average 2014 milk price at 3.3% protein and 3.6% butterfat would be 35c/l + VAT or 36.75c/l incl VAT. Higher constituents mean that most farmers will receive more than this.

 

CL/IFA/20th August, 2014

 

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