11 Feb 2015
Dairy Market Blog – Co-ops can and must hold milk pricesDairy
DAIRY MARKETS ARE RECOVERING
OUTPUT SLOWING— NZ milk output is slowing because of poor profitability (milk price down 43%) and drought. Fonterra have revised their forecast for 2014/15 from one of growth to an expected decrease of 3.3% compared to 2013/14. EU supplies are also moderating, due to low prices (down on average 15%) and superlevy concerns. This has improved market sentiment as to the extent of surplus supply over demand.
Concerns remain over continued US growth in the short term, which reflects low feed costs and high levels of hedging by farmers. However hedging is only ever temporary, and the massive 27% fall in US Class III milk price since last September is set to continue and will eventually catch suppliers up. In the EU, where output has eased to reduce superlevy exposure, lack of profitability will most probably continue to moderate supplies in many regions which were expected to lift production after quotas. That is, unless they can optimise grass and get a favourable spring and summer. Few EU regions apart from Ireland rely significantly enough on grass to be able to do that even with good weather, however, so we would take the view that EU milk production growth will not be as strong in 2015 as earlier end of quota predictions might have suggested.
DAIRY PRICES PICKING UP GLOBALLY AND IN EU—FROM LOW LEVELS— While the IDB PPI index for January eased by 1.4 points to 93.0, EU average dairy product prices have been rising steadily since the beginning of the year, and this should, in time, also lift the PPI. EU butter prices rose by €60/t, SMP €120/t, WMP €80/t, Cheddar €90/t and Whey Powder by €70/t in the first month of 2015.
Returns from a representative Irish product mix, based on those average EU prices, have lifted by 1.4c/l in the last three weeks, from an admittedly low level. At around 33 to 33.5c/l gross, those returns are on an upward curve, and would justify the maintenance of current milk prices in light of the more positive outlook.
Based on: EU MMO data
GDT weighted average price has increased by 2.4%, 3.6%, 1% and finally a whopping 9.4% at the last four auctions. Both butterfat prices and powder prices have increased markedly, the trend for butterfat extending over the last 6 auctions, with butter prices rising 50% over the period. More recently, SMP prices have risen 13% since mid November, while WMP are up 29% since early December. GDT prices for most of the main commodities except Cheddar now exceed the EU average prices for same (see second graph below). Because of the lower Cheddar price, gross returns for an Irish product mix, based on GDT prices on 3rd February, would be no more than 1c/l below that, with a higher Cheddar price, for EU commodities. Taking SMP and butter alone (see table bottom), the returns at just over 35c/l gross are just over 4c/l above EU levels.
Based on GDT
Based on GDT
EXCHANGE RATES IMPROVING EXPORT COMPETITIVENESS OF EU PRODUCTS—EU product prices are buoyed up by the weak €uro, further weakened by the announcement of Quantitative Easing by the ECB and the outcome of the Greek general election, and by the strong US$ reflecting US economic improvements. Against US$ and Sterling, our exported products are increasingly competitive. The €uro has lost 16.2% value against the US$ in the last year, 5.6% in the last month alone. Against Sterling, the €uro has lost 9% in the last year, and 3.6% in the last month.
DEMAND REMAINS STRONG, WITH CHINESE BUYERS RETURNING— Official NZ and Chinese trade statistics show a major increase in imports of WMP (mostly from NZ) in December. China bought 26% more WMP than in November 14, and 10% more than in December 2013 (see graph top right). SMP imports have also increased, albeit more modestly. Infant formulae imports remain very steady, as the preference for non-domestic product continues to prevail among Chinese consumers. Statistics also show that Ireland has, during 2014, been able to increase substantially—from low levels—its SMP exports to China, moving for October 2014 alone from accounting for 1% of Chinese SMP imports to 16%. Our infant formulae exports have also increased.
Lower prices and a weak €uro have allowed EU products to compete on a large number of other markets, however, with SE Asia benefiting in particular from the relatively lower level of Chinese activity in 2014. SubSaharan Africa and the Middle East have also become attractive areas for EU and Irish exports—with a Bord Bia led mission to the Arab Emirates underway as we write.
With the exception of the Baltic States, whose price pressure reflects their unique exposure to the Russian import ban, Ireland was among the four EU member states worst affected by milk price falls in the 12 month period from December 2013 to December 2014. The graph below, produced by the EU Milk Market Observatory, shows this very clearly. This is a disappointing state of affairs when so much investment has gone into improving processing efficiencies (increased scale and capacity, improved energy costs, etc.) and added value, including through the involvement of the industry in the Bord Bia Origin Green marketing campaign and the on-farm SDAS scheme. To sustain the continued commitment of farmers, it is crucial that prices would reflect those efforts and investments from the entire sector, and become less sensitive to wild global commodity fluctuations.
Source: EU MMO
FARMERS ARE UNDER SUPERLEVY AND CASHFLOW PRESSURE
With end December milk deliveries 5.93% over quota, and bearing in mind that every 1% at the end of the quota year is equivalent to €16m, Irish dairy farmers will be facing a record superlevy fine for the last year of the quota regime. Farmers have been pulling back: December supplies were 17.1% down on the same month last year—see CSO graph and data right. They have been drying off early, milking once a day, feeding milk to calves, and co-ops will optimise collections in the last couple of days of the quota year, but even allowing for that, the total bill could reach €80-90m. Assuming that 50% of dairy farmers are over quota, that would be an average bill of around €9,500 per farmer. While some co-ops have provided extended payment terms, and while IFA continue to pursue interest free extended payment provisions from Brussels to ease the burden of superlevy, it will nonetheless make a dent in many dairy farmers’ cash flow in 2015.
Thankfully, dairy farmers had a good year in 2014, with the Teagasc National Farm Survey suggesting an average family farm income for the sector of around €60,000 before tax. However, with Irish milk prices now down 21% from peak, and costs not expected to come down much despite oil prices falling (Teagasc expects 25c/l average production costs for 2015 v 25.6c/l in 2014), farmers will have to pay high tax bills from much reduced incomes. Even the new 5-year averaging, for those who will avail of it, would include 3 reasonable to good years (11,13 and 14) and will not mitigate tax liabilities much for 2015. This too has the potential to erode cash flow dramatically, and to impact farmers’ ability to keep the business ticking over, never mind invest on farm or into the co-op.
OPTIMISING INDUSTRY EFFICIENCIES
With quotas soon at an end, and co-ops in the process of committing farmers to sign up to Milk Supply Agreements, some farmers are keen to explore their options and see whether supplying a different milk purchaser may better serve their interests.
Farmers have the absolute right to choose their milk purchaser. IFA has advised them to weigh up all relevant considerations before jumping ship. This should extend beyond today’s milk price, and include development plans, commitment to long term purchasing of milk, supports for milk price, advisory, price of inputs, merchant credit terms etc.
However, we are very clear that the onus is on co-ops to present a credible and persuasive business case which will convince producers they are worth staying with. Failure to do so will result in the splintering of milk pools which would damage the industry’s efficiency, to the ultimate detriment of all milk producers.