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06 Nov 2014

Dairy Market Blog

Dairy

Troubled times
All market analysts anticipate significant trouble on international dairy markets this side of early summer 2015. This is because fresh milk supplies, together with accumulated stocks continue to outpace demand. And while weaker prices do not stem from the end of quotas, the fact that many regions within Europe are gearing up for the end of quotas may result in additional supplies at a time when markets are still very weak – delaying further a market recovery necessary to sustain better milk prices.
In addition to excess supplies, some of the strong demand which had underpinned market prices in 2013/14 has eased. China has been out of the market for some months, the Russian ban has had its own well documented effect, and while West Africa was starting to respond well to easier prices, the Ebola crisis has rendered buyers conservative.
Lower prices are more attractive to SE Asia and the Middle East, and demand there is well sustained.
Sandy Chen, a Rabobank analyst who addressed the Irish trade mission to China this week said that, while as signalled in the bank’s quarterly report, international commodity prices had reached unsustainable levels and therefore would bottom out, it would take quite some time for commodity prices to recover, and it could take the first half of 2015 before Chinese buying returns to significant levels. Hence dairy returns for at least the early part of 2015 could be significantly down on 2014.
Other analysts have challenged this, suggesting that Chinese buyers, absent from the market for several months at this stage, are bound to return soon. This is because, as shown in the graph below, Chinese buying seasonally lifts up this time of year, and has yet to do so for 2014. Fonterra CEO Theo Spierings expects Chinese buyers to become active again by December.

Chinese WMP imports

Even the pessimistic Rabobank – some analysts say overly pessimistic – expect stronger buying in the next 12 months, while the prices remain affordable, from deficit regions whose economies are improving.
All this, and the reduction in supplies which lower profitability will eventually encourage, will rebalance markets – the issue is not if, it is when.
GDT auction – WMP prices up, but SMP and butterfat prices down
The fist GDT auction for November, covering the trading period from December to May, recorded a weighted average price fall of 0.3% – modest enough, and indicative of a degree of stabilisation.
Different products have fared very differently, however (see below), with WMP, the product the most heavily traded in the auction, by tonnage, recording a 1.6% increase, while SMP, the second most important product traded by weight, fell by 1.2%. Butter prices fell by 4.1%, AMF by 1.6%.
What is very interesting, however, is that the weighted average price for commodities traded next March, April and May are up significantly on previous auction, by 2.3%, 5.1% and 2.5% respectively. This trend of the last three contract prices rising auction-on-auction has been evident in the last two auctions, and may signal expected improved global prices for those commodities around that time.

GDT 2nd Nov 2014
Source: GDT
EU markets – some evidence that butter APS is stabilising prices
EU average market quotes for 2nd November indicate that butter prices have stabilised, presumably in response to the availability of APS. The same APS does not seem to be doing much for SMP, which has continued to weaken to €2,000/t.

EU average dairy prices to 2nd Nov 2014

Average EU returns reflect weaker SMP
The gross (pre-processing costs) returns from the SMP/butter average prices above is around 31.5c/l, while WMP returns just under 30c/l gross, and Cheddar cheese + whey powder around 41c/l. A representative Irish portfolio of those producers would return around 34.5c/l gross.

 

CL/IFA/7th Nov 2014

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