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08 Jul 2014

Dairy Market Blog

Dairy

Supplies continue to outpace demand – will El Nino help?

The new NZ season (14/15) has started very well, with June production reported to be up 10% year-on-year, with some farmers, especially in the North Island, continuing to produce through the Southern Hemisphere winter. The 13/14 season, which ended in May, is estimated to have been up close on 7%, with the Jan-Apr period up a whopping 15.3%. Australian supplies ended their season level with the previous one, but supplies there were up 3.4% for the Jan-Apr period.

US production is up 1.13% for Jan-May, with an additional 40,000 cows in the milking herd.   Production costs are down 45% year on year in the US, with ample stocks of corn at 15 year highs, and milk prices have risen a whopping 30% – though now easing somewhat. The prospects in the US is for continued strong production into the latter part of the year.

The EU – the biggest milk production region – is up 5.7% for Jan-May. Within the EU, the UK alone has produced 13% more milk in the first four months of the year, and is expected to finish the year 4% ahead of 2013. France is up 6.3%, Germany 4.24%, the Netherlands 5%. Ireland supplies were up 7.5% for Jan-May, and 8% for May.

In those member states where superlevy is a consideration, producers have largely ignored it, and the prospect of superlevy has not served its usual moderation function. More recently, a dry spell all around Europe, coinciding with the end of the seasonal peak, has brought supplies more into line.

However, the year-on-year trend for higher global production is continuing, with significantly reduced grain/feed costs, despite some decrease in all EU producer prices.

Global production for the Jan-Apr period is estimated to be up around 4.9%, when demand is only rising between 2 and 3% annually. The supply/demand imbalance on markets therefore continues.

El Nino could help rebalance it, though. The prospects of El Nino related drought over the Pacific rim has now been increased to 90% likely. There is already an impact on India (the largest single country milk producer in the world), and it could also affect Oz and NZ production in coming months.

Fonterra auction results disappointing, but reflect high WMP trade

The 1st July GDT auction was disappointing, with a 4.9% downward adjustment on the weighted average price for all commodities. This was partly due to a large increase in powder sales. It is estimated that an extra 10,000t of NZ WMP was traded when compared with the previous auction. Total quantities exceeded 41,000t, v. under 32,000t the previous auction. However, other than butter milk powder (BMP) all product prices were down.

The major fall in butterfat prices (-7.4% for AMF, and -13.6% for butter) are in stark contrast with firming EU butter prices (see below) and US butter prices, which are reported up 20% since March.

Fonterra 1 Fonterra 2

EU markets: a mixed picture of strong SMP and whey powder prices, and still firm everything else.

SMP appears to be in short supply in the EU at the moment, with the end of the seasonal peak, and skimmed milk and concentrate for drying scarce. A favourable exchange rate with the US $ (=€1.3597 today) also means that what is available is attracted to export. The consequence has been continued small increases in SMP prices since early June. More recent reports do indicate those are stabilising.

Whey powder, which had held its value better than any other product, is also showing strong prices, lifting progressively to €1,000/t.

The price of butter and cheese remains firm as buyers continue to fill their 3rd quarter needs. There is however some nervousness about Russia, a very important buyer of EU cheese and butter. Also, there are expectations of some switching of milk from one product combination to another in a chase for best returns, for example from easing powder/butter to reasonably strong cheese returns – the impact of which could be to reduce the alternative returns.

Whole milk powder prices have eased somewhat, as buyers favour SMP, but while prices are slightly lower, they remain at a significant premium over SMP.

EU Commodity prices 29th June 2014

Source: EU Commission’s Milk Market Observatory

Spot milk prices, which are documented by the MMO for Italy and the Netherlands, have also strengthened considerably in recent weeks (see graph below). These are indicative of lower availability of “milk without a home”, or distress milk, on those markets, and it is also a good indicator of improving returns – albeit still at a discount from those available for most of 2013 and early 2014.

Spot milk price end June 2014

The most recent data from the Milk Market Observatory records the average EU market prices for the main commodities, as graphed above. Using the most recent figures (29th June, last week), we can see in the table below that our estimated gross returns (before processing costs) for a representative Irish product mix have been in and around 42c/l for the entire month of June. This would indicate that, assuming processing costs of around 5c/l, co-ops should be capable of holding a June milk price of around 37c/l + VAT.

REturns EU

REturns Irish

IFA calculations based on EU MMO data

IDB index would justify 37.5c/l incl. VAT

The June IDB PPI index was down 2.4 pts to 121.5 points (see graph below).

The PPI is based on 2010 100 base – i.e. the level of trade and price experienced by the IDB for a representative product mix in that year. The June 2014 index is therefore 21.5% above the 2010 base.

The average milk price paid to farmers in 2010 as per the Central Statistics Office (CSO) was 29.3c/l + VAT. The June 2014 IDB PPI index would therefore justify a price level for milk supplied that month of 21.5% above the average 2010 milk price, i.e. 35.6c/l + VAT, or 37.4c/l incl VAT.

IDB index June

 

CL/IFA/8th July 2014

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