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08 Oct 2014

Dairy Market Blog

Dairy

Markets continue to weaken, but buyers returning and long term outlook continues strong

While global commodity prices and EU average prices continue to weaken as a result of market imbalance and the Russian ban, there is increasing evidence that buyers are returning in earnest.

Dairy Australia has reported that Middle Eastern buyers, who had “traded down” to dairy substitutes in response to very high prices, were now returning to dairy purchases, especially in butter, AMF and WMP. While this return to trade appears to have benefited the US and NZ more than the EU and Australia, it is nonetheless welcome renewed activity. Other buyers from Africa and South East Asia in particular are also reportedly more active, spurred by lower prices.

Current market turbulences should not lead to panic: the long term outlook for growing dairy demand remains as firm as ever. In fact, in its 7th Dairy Index report published at the end of September, dairy market analysts in international packaging firm Tetra Pak predicted that global demand would grow by 36% over the next decade – this is 3.6% per annum, a major increase on the current 2 to 2.5% trend.

Most of this would come from Asia, South America and Africa. By 2024, India’s demand was predicted to grow by 120% in milk equivalent, while China’s by 78% and Africa’s by 60% (see graphs below – click on them to increase the size). Much of this demand would continue to be satisfied by imports, and surplus regions (the EU, US, and Oceania) would be well placed to cater for this, with supplies chasing a faster rising demand over the period.

Tetrapak 1

 

 

 

 

 

 

 

 

 

 

Tetrapak 2

 

While this is a timely reminder of the sound underlying trends for the sector, the report warns of continued volatility, of low to negative (for some products) consumption growth in developed countries and advises exporters to not just rely on exports—but to also to make strategic investments in their export markets.

Reassuringly, this is the strategy pursued for some time now by the Irish Dairy Board and a number of our Irish co-ops.

The full Tetra Pak report and presentation can be found at http://www.tetrapak.com/about-tetra-pak/press-room/news/tetra-pak-dairy-index-rising-global-demand-requires-careful-balancing-act

Current situation: supply growth continues despite weaker commodity prices

Global milk production has continued up year on year in all main regions, as weather events have not interfered and profitability has not yet decreased to the point of discouraging production.

World supplies for the first seven months of 2014 are up around 4.4%.

US production rose 1.7% between January and July. Supplies have been up year on year since March, and up 3.9% for July and 2.5% for August. High cow numbers, good grain harvest and low feed and labour costs, as well as the ability of a good number of farmers to lock in margins, have enabled farmers to continue producing strongly. Another factor has been the fact that domestic dairy prices have held quite high, apparently impervious to world market developments. US milk prices are expected to catch up in 2015, with predicted falls of 15 to 20%.

NZ supplies are up 16% for Jan to June (the tail end of the previous season), and by 4% for the season from June to September. October is the peak month, but supplies only ease slowly after peak.   The 13/14 payout (price and dividend) amounted to a historical record level of NZ$8.50/kg MS (a 39% increase on previous year), but the forecast payout for 14/15 has been recently revised down to NZ$5.55 to 5.65.

Australian supplies were up 1.5% year on year in July, the first month of their new season. In the period from January to July, supplies grew by 4.5%.

EU supplies are up 5% for the Jan/Jul period. Within that, France and Germany are the largest producers, and their supplies have been well up throughout the period. For the third week in September, they were up 6.2% and 4.2% respectively. Their supplies for January to July were up 6.2% and 4.1% respectively. The UK has also been increasing production dramatically. September supplies are reported 9% up year on year, while Jan to July supplies were up over 10%. The Netherlands produced 3.5% more milk in January to July, with Poland up 7.7% for the same period.

Of course, Ireland was no exception, with supplies year to end August up 6.4%, and August supplies up 2.7% on an already high August 2013 figure (see graph below).

 

CSO to Aug 14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EU and global commodity prices continue to fall

With supplies continuing so strong and demand steady to lower, inevitably, international dairy commodity prices have been falling.

While EU average prices have held up better than GDT levels, returns are lower for all commodities – with the exception of whey powder.

The graph below shows the results of the first October GDT auction: a very disappointing 7.3% fall in the weighted average price, reflecting significant decreases for all prices (see both graphs below).

GDT 1st Oct 14

 

 

 

 

 

 

 

 

 

 

GDT products 1st Oct 14

 

 

 

 

 

 

 

 

 

 

 

 

EU commodity prices affected by Russian ban

It is clear from the graph below that, from its inception in early August, the Russian ban precipitated faster price reductions for most dairy commodities, with the notable exception of whey powder.

The weak Euro against the US$ and Sterling has worked to the advantage of exporters, however.

What is also interesting to note from the below is what appears to be a stabilisation of prices in the last two weeks of data (to end September).

EU avg prices - 28th Sept 14

 

 

 

 

 

 

Returns

Returns from the main EU dairy commodities, based on EU/Irish reported average market prices to the end of September would be around 36-37c/l gross (before processing costs).

IDB PPI for September equivalent to 33.90c/l incl VAT farmgate price

The Irish Dairy Board PPI for September has come back 4.6 points to 110.2 – which would be equivalent to a milk price of 32.28c/l + VAT, or 33.90c/l incl. VAT. August milk prices were between 33 and 35c/l incl .VAT, so there should be little if any need for adjustment in the September milk price.

 

IDB PPI to Sept 14

 

 

Source: IDB

EU action on the Russian ban

The EU U-turn on the cheese APS was disappointing, but 100,000t out of the 155,000t maximum envisaged did find their way into the scheme. Also, the scheme remains open for the other two commodities, and 8,800t of butter and 4,300t of SMP were taken in by 21st September.

There is much discussion at the moment as to other measures the EU Commission may bring in, with a major push from the very badly affected Baltic States (Estonia, Latvia, Lithuania) and Finland to obtain direct farmer compensation.

Decisive action by the EU Commission ought to help turnaround market sentiment, but the U-turn on cheese APS did not help.

IFA has been calling since the ban was announced for a suite of measures to do just this. The EU Commission must review the safety net intervention price levels to reflect rising costs; it must help exporters find alternative markets with simplified bureaucracy and targeted export refunds, and it must make full use of the €409m in EU wide superlevy fines collected for this year to support dairy markets

A Polish proposal is coming officially in front of the next EU Agriculture Council on 13th October, in favour of the reopening of export refunds, and either elimination or reduction of the 2014/15 superlevy fine, in recognition of the impact on milk prices of the Russian ban. IFA has urged the Minister for Agriculture Simon Coveney to support this move and work on achieving the required level of support to force action by the EU Commission.

IFA National Dairy Committee Chairman Sean O’Leary sets out IFA October milk price campaign: co-ops must preserve farmer confidence with the strongest possible prices into spring

Sean O’Leary this week urged early milk price setting co-ops to recognise the major influence they have on price setting, and therefore farmer confidence, all around the country. With that influence comes a heavy responsibility at a time when farmers are transitioning into the post quota era, and have cost levels which will require milk prices north of 30c/l to allow them cover costs and remunerate their own labour, with more needed to allow for necessary growth investment.

In the September/October Today’s Farm publication, Teagasc reminded us that we made a slightly higher margin per litre of 12.6c/l in 1995 with a milk price of 30c/l than the 12.1c/l margin we made in 2013 with a milk price of nearly 38c/l – and this despite greater efficiencies, scale, better farming and yields (see table below).

Teagasc production costs

 

 

 

 

 

 

 

 

 

 

 

 

Questions and comments from dairy farmers to IFA at the Ploughing were a clear indication that the level of price for next spring is their top concern.  With costs of around 27c/l for 2013 according to Teagasc (see below), and international evidence confirming that milk is getting dearer to produce in all global milk production regions, milk prices will have to trend higher for production growth to be sustainable.

Capture

 

 

 

 

 

 

 

 

 

 

 

 

In the short term, while we appreciate that global market imbalance exacerbated by the knock on effect of the Russian ban has put major pressure on spot and average commodity returns, it is vital that co-ops would demonstrate the value of the quality markets and contracts they have told us they have developed and made a strong commitment to in recent years.

This commitment, which saw those customers benefit from lower prices when spots and averages were on the rise, must now come into play. It is crucial that co-ops would make every effort to pay the highest possible milk prices well into next spring, and ensure that farmers can at the very minimum break even for the duration of this temporary market turbulence. This is the single most important decision co-ops can take to protect farmer confidence, and ultimately secure the long term future of the dairy sector.

 

CL/IFA/8th October, 2014

 

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