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15 Oct 2018

Dairy Market Blog

Dairy, Dairy Markets, FMP, Liquid Milk

Output growth expected to be relatively modest

The most recent EU short term outlook report published by the EU Commission shows EU milk supplies have grown more modestly, rather than fallen due to the drought.  However, it is expected that fodder supplies for the winter will be particularly affected in Germany, Northern France and the Benelux.  Ireland will most probably has similar problems, as will the UK.  Milk supplies for August were estimated at +0.5%.

Consequently, the EU Commission has revised its projected production increase for 2018 from 1.4% to almost half, at 0.8%.  For 2019, the continued impact of fodder shortages leads the Commission to estimate production growth at no more than 0.9%.  For both years, the EU Commission expects to a very small downward adjustment in cow numbers.

Source: EU MMO

Global supplies for the year to August were reported 1.5% up.  The graph right shows that somewhat slower EU growth for the month of August is being compensated for by rising US and NZ production.

Source: USDEC

Demand good in US, SE Asia and China, but growing less fast than output

Global dairy demand forged ahead in the first half of 2018, but is now reckoned to be rising by only 1% – with global output rising 1.5%.

Demand remains good in China, though import growth has slowed for the Jan-Jul 18 period compared to the same period in the previous year.

Source: CLAL

In the rest of SE Asia, demand for powders and casein has improved after a poor start to the year, while demand for cheese and butter is strong, albeit from low levels.

In the US demand is very strong for cheese and butter (after a poor 2nd quarter), while powder demand is slow.

Mexico, Algeria, Egypt and Singapore have seen strong increases in SMP imports, with strong increases in imports of butter in China, the US and Australia.  Cheese imports to Japan and Russia have also increased strongly – Russian imports came from outside of EU, which remains embargoed.

Source: EU MMO

Commodity prices easing, but September returns still stronger than current (Irish) milk prices

Commodity prices in September evolved positively generally in Europe – though butter did weaken – but significantly worse in Oceania.  Commodity prices between the two regions continued to diverge, with higher SMP prices in Oceania, and lower prices for most other commodities – especially significant difference on butter.

Source USDEC

Based on data from: EU MMO

More recent trends in Europe – late September/October – suggest continued easing.  However, returns from the main commodities for 30th September remained above 37c/l before processing costs – so a milk price equivalent of 32.21c/l + VAT (33.95c/l incl VAT) after a notional 5c/l processing cost has been deducted.

Based on data from: EU MMO

Outlook a mixed picture

Global output growth shows diverging trends in different regions: strong increases in NZ (and South America), relative stability in the US, and expectations of lower output at year end and new year from EU due to the impact of drought on fodders stocks.

While EU overall supplies have risen 1.7% for the January to July period, they have slowed in August, and statistics for the most recent period suggest that Germany, France and the Netherlands have seen negative growth.

While rising oil prices and a strong US$ are major positives, traders are concerned about what is going on in New Zealand: the NZ$ is very weak against the Euro, further lowering the price of NZ products on exports, volumes of milk are rising fast (+4.6% in August) and the GDT prices have been at odds with trends in Europe for some time, and are now dragging EU prices down.

Trade/tariff wars, the prospect of a potential hard Brexit and slowing global economic growth are also feeding into a somewhat less positive sentiment – all the more so when traded volumes were stronger in the first half of the year than they are now.

The normal bounce from the “holidays” demand (Thanksgiving, Christmas…) has been limited.  Stocks of butter have been rebuilt, and so prices have eased – though the expectation is that lower milk output over the winter and early part of 2019 will likely help prices recover.

Meanwhile, from an Irish milk price perspective, stability should be the worst case scenario between now and year-end.

 

CL/IFA/15th Oct 2018

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