Largescale SMP stock disposal may presage stronger powder markets in 2019

Just over 203,000t of SMP were sold out of intervention stock this year, with minimum sales prices edging up slightly from July.  Latest minimum sale price, at €1251/t, are €100/t or less below the quoted price for fresh feed grade SMP.

Source: IEG Vu based on EU MMO

Feed SMP spot quotes from France Agrimer for 24^th October was €1248/t; PZ quotes for the Netherlands were €1390/t on 14^th November, while Kempten (German) quotes for the same day were €1330/t.

We estimate that around 170,000t of SMP are left in intervention store, which is still a significant amount of stock.  Also, some analysts report that at least some of the tonnage sold out of intervention could still be in (private) stock as opposed to utilised in the market place.

Even allowing for this, there will be at least 2 more sales of SMP out of intervention by year-end, and real scope for further sales next year as demand from calf milk replacer manufacturers rises in spring.

Current fresh food-grade SMP prices, based on latest EU Milk Market Observatory reports dated 4^th November, have edged slightly up at €1580/t.  Futures markets for the last few months have consistently suggested SMP prices into 2019 trending towards €1700-1800 in 12 months’ time.  Not a very exciting price, and in fact just over intervention buying-in prices, but well up on current levels.

While the price trend for butter and butterfat has been down, while remaining at historically strong levels, we would be hopeful of a rebalancing of the SMP/butter price relativity sustaining reasonable returns into next spring.  Of course, this depends strongly on global output trends (see below).

Milk supplies picking up in NZ, US but easier in EU

September production in the EU is estimated by USDEC (graph below) to have eased slightly.  There are no official figures available yet, but this is credible in the context of the impact of the summer drought on fodder and feed availability and costs.

Source: USDEC

German supplies for September are estimated by INTL FCStone to be 0.5% up, and French supplies 4.4% down on last year.  Dutch milk output for the Jan-Sept period was down by 1.9% according to ZuivelNL.

Global supply balance however is very modestly up, as can be seen in the USDEC graph, and this in conjunction with still high intervention stock is creating its own expectations.

Latest estimates of current demand growth are at 1%, due to a slowdown in the economy of China, and slower imports from SE Asia in general after a very strong 1^st half, while output growth is outpacing demand slightly at 1.5%.

Returns easing at home, in the EU and internationally – though powder prices firming

The impact of the recovery in supplies coinciding with strong stocks and slightly easier demand is, predictably, that returns have been easing.

EU MMO figures (see below) suggest gross returns, before processing costs are deducted, of between 34.87c/l (allowing for Irish butter and SMP price) and 35.74c/l (allowing for EU average prices for all products) – so after a notional processing cost of 5c/l, a milk price equivalent of between 29.87 and 30.74c/l + VAT (31.5c/l – 32.4c/l incl VAT).

Based on EU MMO data

Closer to home still, the Ornua PPI for October has dropped a little further, from 110.4 points to 106.5 points – the latter equivalent, according to Ornua’s own calculations, to a milk price of 30.26c/l (31.9c/l incl VAT).

IFA’s recent research has shown, as per our November Dairy and Liquid Milk newsletter here that co-ops have undershot the PPI from May to September, costing a 350,000l milk producer up to €1900 over that period.

Source: Ornua

The future looks somewhat more encouraging for powder, however, with spot quotes rising for the last 3 weeks, and having again broken through the €1600/t mark in Germany, France and the Netherlands.

Interestingly, too, bearing in mind the importance of whey in most of our milk processors’ product mixes, average whey prices and spot quotes have also been rising over recent weeks.

Finally, European futures for SMP published today (15/11/18) suggest an expectation of SMP price recovery in 2019 to levels between €1700-1800/t.  Fast reducing SMP intervention stocks may influence this even more positively over the coming weeks and months, however.

On the same date, SMP trading on the NZX futures for the period January to April 2019 has sold for prices between US$2080-2175 (€1840 to €1924 at today’s exchange rates).

GDT – a bit of context

Much has been made of the fact that we’ve had 6 consecutive negative GDT auctions in the last 3 months.  However, since last August, the SMP prices has actually improved by US$50/t, to nearly US$2000 (€1770).

Also, the quantities on offer in any one auction tend to be a very small fraction of international trade.  The table below outlines the quantities which are expected to be made available for sale at the next auction on Tuesday 20^th November.  While WMP is as usual the product of which the largest quantities are traded, most other products are traded in much smaller volumes.

For context, GDT traded 654,000t of all products combined in 2017.  For the same year, total dairy exports (all products) out of New Zealand amounted to 3.26m tonnes; exports of cheese, SMP, WMP and butter from the EU to 2.14m tonnes and 1.94m tonnes from the US.

Source: INTL FCStone based on Fonterra

CL/IFA/15th Nov 2018