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29 Aug 2014

Dairy Market Blog

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Dairy Market Blog – 29th August 2014

 EU Commission opens APS and extends intervention deadline to support dairy marketsRussia flag map

It was good to see that the EU Commission was really prepared to take action to support dairy markets in the face of the Russian ban. What impact it will have on markets remains to be seen, in what is a very fluid and volatile political situation.

At a meeting of the EU Dairy Management Committee on 28th August, Commissioner Ciolos announced the APS scheme would be open for between 3 and 7 months for SMP, butter and certain cheeses. The latter may require further legislating by the Commission as CAP currently only provides APS for PGI cheeses (cheeses with Protected Geographical Indication).

APS (Aid to Private Storage) gives operators a subsidy towards the cost of storing product for a period of time, thus taking it off the market and helping to temporarily rebalance supplies. At the end of the period, however, the product comes back out on the market – but having it stored for a period can be just enough to allow markets to pick up before this happens.

There is continued activity in Brussels, with a number of meetings of Commission services and Member States representatives, to both monitor markets and assess the need for further action – which the Commissioner has said would be forthcoming if required. Again, positive, but the actual impact is as yet unclear.

Russian economy suffering from international sanctions

A weakening Rouble (the Russian currency), growing inflation,  flight of capital, sovereign bonds declining in value, the Russian economy, estimated at US$2 trillion, is suffering seriously.

The political situation with Ukraine is very volatile and appears to be escalating.

A Russian economy in recession is in no-one’s interest, but could precipitate a diplomatic resolution of the current political conflict, and with it a return to more normal food trade between the EU and Russia in time. Of course, there is also a more pessimistic analysis that could be made of the current very fraught situation! The fact is no-one knows, and we can only watch as events unfold.

From a trade viewpoint, after a short term shock, the likelihood is that trade flows will simply redirect themselves, with Russia importing from New Zealand and some South American countries while EU milk which used to go to Russia will find other global market gaps.

It is fair to say that, whatever about the political crisis with Ukraine, the dairy price implications will be relatively short lived. It is important to hold one’s nerve.

EU prices react strongly to Russian ban

In the last couple of weeks, EU dairy commodity markets, which up till now had held firmer (though easing all the time) than global market quotes, have dipped reasonably significantly, especially powders, including whey powder. (See graph below). While the temporary global supply/demand imbalance was what accounted for most of the easing since January, and while a pattern had developed of buyers buying short (6 weeks rather than, say, 6 months) it is clear that the recent developments are in reaction to the Russian ban.

eu commodity prices 24th Aug 2014
Source: EU MMO

As previously stated, Ireland does not trade much directly with Russia, but the EU as a whole does, with around 1/3 of dairy exports, mostly butter and cheese, going there. The knock on effect of the ban has been a move towards more milk going away from cheese and into SMP/butter in those countries most directly affected (Netherlands, Lithuania, Poland, Finland). There has also been a very noticeable effect on prices in recent weeks, as product could not find a ready alternative market, and buyers used the situation.

Spot prices, both commodity and milk, which are more sensitive and reactive to very short term developments, show this much more strongly than average market prices. Spot prices are the price for a product right now – so not covered by contract.

Spot milk prices 24th Aug 2014

Market returns have been affected, and between 10th and 24th August alone, a representative Irish product mix has lost around 2c/l (see tables below).

EU returns 24th Aug 2014 Irish-EU returns 24th Aug 2014

Irish and global supplies continue to grow

Good profitability continues globally, with low(ish) feed costs, still strong prices and good weather conditions.

The likelihood of an El Nino event affecting NZ/Oz production has receded from 90% as assessed last May to over 50% in August according to the Australian Bureau of Meteorology, though this is still double the normal likelihood of such event. (See BOM ENSO tracker below).

El Nino tracker

So for the moment at least, strong milk supplies continue globally with US supplies up a massive 3.9% in July, New Zealand up 11% in June, the EU January to June supplies were up 5.1% – among which UK supplies up 10.7%, France +6.2%, Netherlands +4%, Germany +3.6%.

In Ireland, supplies have also continued strong into July (see CSO release below).

CSO irish milk supplies to July 14

Outlook?

The Russian ban is feeding into conservative buyer behaviour in all markets, and affecting EU dairy prices at least short term.

However, global buyers outside Russia have been buying short for months, and will need to come back to markets to fill their year-end needs.

The next GDT auction on 2nd September next, will be most interesting.

Irish milk supplies are highly seasonal, and while they have increased massively in recent months, it is reasonable to expect a strong pullback over the coming months as the prospect of high superlevy fines encourages earlier drying off. This means that the impact of lower market returns should be felt on somewhat lower quantities of product – and have therefore limited consequences on producer prices over and above the up to 4c/l cut already implemented to July.

 

CL/IFA/29th August, 2014

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