05 Sep 2014
Dairy Market BlogDairy
Further pressure on dairy markets
The most up to date data as available from the EU MMO and various other sources shows the pressure on returns has been exacerbated by the Russian ban.
However, it is still the case that European prices are operating at higher levels than GDT auction prices – so for anyone to use GDT to argue down Irish milk prices is a little disingenuous.
1 – Average EU dairy commodity prices
Butter and powders have seen significant reductions in the last couple of weeks, which would seem to indicate that some of the milk that would have been exported as cheese to Russia may now be finding its way into SMP/butter or WMP.
Ironically, cheese prices have held much better, though the average EU price hides a multitude of different prices. Only Cheddar appears in this graph to avoid it being too busy, but other cheeses (Gouda, Emmental, Edam) also reflect reasonably steady prices.
2 – Returns from average EU dairy commodity prices
Returns have come back by between 1.5 and 2c/l in the last week alone, and around the same level in the two previous weeks. While returns had been slowly easing since January in response to faster supply than demand growth, this is an acceleration of the process.
Still, at 31st August commodity return levels, current prices levels of 33 to 34c/l + VAT as paid by most co-ops for July milk are just about covered. anticipation of this trend continuing, at least in the short term, may influence August milk price decisions.
3 – EU spot quotes
Unlike average market prices, spot quotes capture market developments quickly, and so in situations of price deflation as we are at the moment, tend to be lower than average market prices. They too are influencing market sentiment in a negative fashion at the moment.
The table below outlines the equivalent gross return per litre of the prevailing Dutch, German and French spot quotes for the main dairy commodities, all dated 3rd September.
4 – GDT 2nd September auction
The 6% decrease in price was disappointing to say the least. At 57,000t – the highest level since August 2013 – quantities traded were roughly 11,000t up on the previous auction, and around 4,000t up on the same auction last year.
All product prices fell relatively dramatically, as shown by the graphic below. Price evolution is the figure in the middle of the circle, while the shaded portion of the circle indicates the relative quantities of each product traded (the actual tonnage is not given for a few months after the auction).
Perhaps with the exception of SMP – considered by all to be a truly global product – all product prices are massively lower than their EU equivalent at roughly the same period – albeit that the GDT auction is an average of contracted prices for the next 6 months starting October, while the EU average is for 31st Aug 2014.
5 – Conclusion
Markets are clearly under pressure, but it is difficult to predict accurately what will happen next, as much of it is conditioned by how the Russian ban actually pans out – and this could take some time to work out.
EU emergency supports as outlined in the Sept newsletter have been published in the Official Journal of the EU today, and will come into law from tomorrow. Hence APS will open from the week end. It will be interesting to see whether removing product from the market place helps improve market sentiment.
Interestingly, Dairy Australia commentators were suggesting that the announcement of those measures by the EU was part of what may have led to the fall in the GDT price. Market sentiment is everything at the moment. It is important to hold one’s nerve and to take things one day (month, from the milk price point of view) at a time.
A little addendum: the €/US$ has reacted quite strongly to recent developments, and more so again I gather overnight as a result of the reduction in the ECB rate. This ought to help make EU exports a great deal more competitive – nearly 6% more competitive today, say, than on 1st July 14 (see graph below).
CL/IFA/5th September, 2014