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28 Nov 2014

Dairy Market Blog

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Challenging trends ahead of Spring 2015

Global milk supplies still rising – though more slowly in some places

Milk supplies from the main exporting regions were estimated to be up 4.2% for the January to September period.

New Zealand supplies for the same period were up 12%, though September supplies were up 5.2%, and with the slashing of the forecast 2014/15 price to around NZ$5/kg MS (approx. 22c/l), Fonterra now forecast their total 14/15 season’s production to grow by no more than 2%.

NZ milk production to Sept 14

 

Source: DCANZ

 

US production continues to grow strongly (see the first graph below), though US dairy prices, which had held up at very high levels, are now coming under pressure. Higher cow numbers (see the second graph below), access to low cost feed and labour, and the ability of many farmers to lock in their margins are all contributing to keeping output up. October milk supplies were 3.8% up on the same month last year, and Jan-Oct supplies were up 2.2%.

US milk production to Oct 14

US cow numbers to Oct 14

In Europe, growth may be slowing down somewhat in recent weeks due to the onset of winter and the looming superlevy for a number of member states. However, output is still rising, and for the January to September period, supplies were up nearly 5% – the only member state recording negative growth being Greece (see graph below).

GDT auction – strong price gains for butterfat and cheese, but powder and casein prices fall

The GDT auction on 18th November saw a very disappointing weighted average price fall of 3.1%, with lower quantities traded – the volume was down 13% compared with the previous auction, and 24% less than the same auction last year.

The next auction will take place on Tuesday 2nd December.

GDT 18th Nov - 1 GDT 18th Nov - 2

 

Source: Global Dairy Trade

 

What are the chances of a weather event to rebalance supplies?

A weather event in Oceania could curb end of season supplies there. In this respect, it is interesting to note that the ENSO tracker, an Australian Meteorological monitoring instrument, has increased the likelihood of an El Nino event to “alert level” – a 70% likelihood of an event occurring during 2014-15. Of course, there is no guarantee that such an event will happen, nor that if it does it would impact weather conditions and therefore supplies to a significant extent. (See El Nino Tracker below)

ENSO

In the US, while dryer than normal conditions are reported for California, the MidWest – now biggest US milk production region – is reporting more normal moisture levels.

The European late winter/spring weather is an unknown at this point.

A significant weather event could turn around the supply/demand balance rapidly – but evidently cannot be banked on!

What about stocks?

Dairy stocks in private hands are difficult to quantify, but they are known to be excessive, and to contribute to the current market weakness.

Institutional stocks, on the other hand, are documented.

As at 23rd Nov 2014, EU APS stocks were: butter: 20,316t; SMP: 14,198t; cheese: 100,803t. Despite the reopening of the intervention scheme, as we write no product has yet gone in, and stocks are at zero.

US institutional stocks are only available up to August, and at that point they stood at 75,000t of butter, and 110,000t of SMP.

Stocks held by Chinese traders, who overbought powder at expensive prices in 2013 and early 2014, are reported to be sizeable, and are still keeping buyers from returning to markets – although we may be seeing some sign of bounce back there – see below.

EU Average commodity returns

Butter prices had stabilised a little in recent week, most probably in response to the opening from September of the APS scheme. However, the same scheme did very little for SMP which has now fallen below €2,000/t.

Avg EU Commodity prices - 23rd Nov 14

 

Source: EU MMO

 

Returns from a representative Irish product mix, based on the EU average prices reported for 23rd Nov 2014, would have amounted to 33.57c/l gross (before processing costs).

Factoring in the Irish reported average butter and SMP prices, as per the second table below, would yield a gross return slightly below that at 33.36c/l. This reflects a significantly lower butter price (which has fallen below the EU average only in the very recent past) and a €30/t higher SMP price compared to EU average.

Returns 1 - 23rd Nov 2014 Returns 2 - 23rd Nov 2014

 

Based on: EU MMO price reports

IDB PPI drops to lowest level in two years

At 102.8 points for October 2014, the IDB PPI is equivalent to a farmer price of 31.63c/l incl VAT.
The IDB predict – and market evolution since October would indicate – that the PPI will fall further by year end.

IDB PPI

 

Source: IDB

Update on the Russian banPutin

Food price inflation in Russia is at over 27%, well ahead of general inflation, though this is very high too at over 8%.

There are mixed reports of some shortages of fresh produce in supermarkets, and other suggesting that there is no such thing – though prices are well up.

There are also reports that some produce from the EU is still making its way to Russian supermarket shelves by round-about means. It is hard to know just how credible any reports are.

EU Commission estimates suggest that the impact on EU dairy prices of the Russian ban was a 15% average reduction in dairy prices. SMP declined by most, with prices down 28%, WMP fell by 22%, cheddar by 12%, butter by 11%, gouda by 11% and whey powder by only 6%.

Market support measures implemented by the EU thus far on the dairy side have had limited impact, though APS seems to have stabilised butter prices somewhat.

The measures implemented were as follows:

  • Opening of APS to all cheese (including non PDO cheeses) up to a maximum of 155,000t – this was closed abruptly once just 100,000t were put in, much of which by Italy, as the EU Commission felt it was not supporting the most directly affected operators.
  • Opening of APS for SMP and butter
  • Promotional packages – to be matched by national funding

The most directly affected countries, the Baltic States (Latvia, Lithuania and Estonia), have now won a campaign to obtain direct supports for their farmers. Producer milk prices there have fallen by 30-40% since the ban, and are in many cases at or below the intervention “safety net” level. In recent weeks, the EU have agreed to give them a once off package of direct supports worth €28m – though the Baltic States were looking for a multiple of that!

Finland are also campaigning for direct farmer supports, though their producer milk prices have been much less severely affected thus far. Valio, which had to make a few hundred workers redundant as a result of the ban, are now believed to be exploring options to open a factory on Russian soil.

Direct farmer supports are far from ideal, as they do nothing to rebalance markets. Were it to be paid as a lump sum to each farmer, the amount granted by the EU Commission for the Baltic States is equivalent to €580 for each of the approx. 48,000 dairy farmers in those three countries!

Other market news

Is the Chinese trade bouncing back?China

A TB and brucellosis scandal has affected one of China’s largest milk processor Modern Dairy, and its farm unit in recent weeks94 cows were sold from that farm which had tested positive for TB and brucellosis, but no product was recalled. Press coverage of the scandal, including reports of cases of transmission to humans of both diseases, have severely dented a slowly recovering Chinese consumer confidence in their domestic products.

It seems that China’s attempts at improving its self sufficiency (currently at around 70-80%) have some way to go to address regulatory and quality problems.

Could this hasten the return of China to world markets to supply their needs with more positively perceived product?

Indeed, there are already some reports of increased buying activity for SMP. This follows a period of falling SMP prices, and although Chinese demand is sluggish overall, there have been reports of up to US$66.2 m (€52.2 m) worth of trade made by various European exporters during October 2014.

Ireland appears to have done relatively well out of this, with sales reported of 2,500 t (over 10 times what was traded in Oct 13), and believed to be worth €8.4m.

 

CL/IFA/28th Nov 2014

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