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Trade and farmer purchases of new season fertiliser stock pre-Xmas particularly were significantly back on the previous year as nitrogen prices had ratcheted up pretty steeply from mid-August 2018 onwards.

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IFA President Joe Healy has acknowledged the announcement by the Minister for Agriculture Michael Creed that capacity in lairage facilities in Cherbourg will increase to accommodate an additional 400 calves per day. However, he said more spaces are needed urgently.

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EU supplies down in early 2019

French milk supplies were down -3.1% in week 4 of 2019 (see graph right) and (most recent monthly figure available) down 3.7% in November 18 compared to November 17.
This is the continuation of an ongoing trend towards significantly lower output compared to previous year since the first week of August 2018.  Also, output has been consistently below the 5-year average (yellow line in graph below) since almost this time last year.

Source: France Agrimer

German milk output has also been below year-earlier for almost all of the same period (from August 2018 todate).

Between them, France and Germany account for 37% of all the milk produced in the EU 28.

Dutch milk production has fallen 2.92% in the January to December period according to ZuivelNL, the Dutch dairy industry organisation.  This is due to the restriction on the national dairy herd imposed to reduce phosphate output.  Dutch milk supplies account for a further 9.4% of EU supplies.

Source: ZMB

UK milk supplies have been increasing in recent months, rising above 2017/18 output since November.

December 2018 UK output was up 1.7%, but the April to year end output was level for GB, and up 2.3% for NI.  The UK accounts for 9.6% of EU supplies (see pie chart below).

Source: AHDB Dairy

Source: EU Commission

More dynamic countries from a milk production perspective include Denmark (up 2.5% for the full year, and 2% for December); Poland (up 2.6% for the full year, up 3% for November) and of course Ireland (up 4.3% for the full year, up 23.2% for the month of December).

Poland accounts for 7.3% of overall EU supplies, with Ireland at 4.5%, and Denmark at 4%.

So, with almost 50% of the EU’s milk output in negative growth, the EU’s milk production has been restrained in recent months, with November output down 0.8% and predictions that this trend will likely continue into spring 2019.

Global supplies: a mixed picture, but flat at back end

Global milk supplies were estimated to be up 1% for 2018, but flat at year end because the EU, Argentina and Australia are all well down.

US output was up moderately, 0.8% for November (no more recent figures due to Government shutdown) and +1.2% for the January to November period.

New Zealand production continued to increase strongly, by 2.3% for the year, and 4.4% in December alone.  However, restrictions from environmental legislation enacted by the current Labour government will likely reduce scope for growth in the medium to longer term.

Source: AHDB Dairy

Intervention stocks depleted to almost nothing – with rising sales price

Almost all the over 400,000t of SMP sold into intervention since 14/15 have been sold out, with recent prices keeping pace with fresh feed grade prices of around €1660-1670 (German and Dutch, 6th Feb quote).  The latest minimum price adjudicated for sale of intervention powder was €1622/t on 2nd February.  As the range of bids was up to €1710, some product will have sold for a higher price up to that maximum.

Remarkably, the 3,500t which were left to sell did not find buyers, only 584 tonnes were sold.  Spain, the UK, Slovakia and Finland are the countries where this left-over product is stored.  All Irish stock has been sold.

For all intents and purposes, the intervention stores are now as good as empty, and with restrained fresh milk supplies, the price of powder will hopefully continue to firm.

Based on EU MMO data

Dairy prices stable to firmer

The firming of powder and butter prices we have seen in recent weeks has continued in a more modest way.

The nominal Irish product mix whose returns we follow on the basis of the EU Milk Market Observatory weekly average price reports has improved by around 1.3 cents per litre from early January to early February.

Based on the EU MMO average prices quoted for 3rd February, the representative Irish product mix would return gross 36.1c/l before processing costs.  Assuming the deduction of a nominal 5c/l for processing costs, this would be equivalent to 31.1c/l + VAT, or 32.78c/l incl VAT.  This is around 0.5c/l more than the average of the FJ League for milk purchased in the month of December.

Based on EU MMO data

 

Spot quotes, which had stalled and eased in recent days, are also firming again very slightly for SMP and whey in early February (table below).

Source: INTL FCStone

Returns – improvements should help hold milk prices in short term

Most of the indicators we follow on the market place have improved by 1c/l or more in the last month to month and a half.  This reflects continuous improvement in powder prices (especially SMP) and while butter prices had been easing for several months, they have been firming slightly in recent days/weeks.

The average price paid by co-ops for December milk was, based on the Farmers’ Journal milk league, 30.67c/l + VAT.  The below suggests that this would be comfortably sustainable based on current (late Jan to early Feb) returns as illustrated by a variety of Irish, EU and international indicators.

Sources: EU MMO, INTL FCStone, Ornua, GDT

CL/IFA/12th February 2019

Speaking after a meeting with UK farm leaders in London ahead of the crucial vote on Brexit in the House of Commons, IFA President Joe Healy said the clear view of farm leaders was that a ‘no deal’ Brexit would be a disaster for farmers in Ireland & the UK and must be avoided.

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Focus on SMP: markets recover globally as intervention stocks collapse

The positive indicators for SMP markets have continued to mount up into the New Year, the most remarkable probably being the rapid sales of increasingly large tonnages out of intervention at rising prices.  A total of 357,345 tonnes have been sold out of intervention in the period from December 2016 to-date, leaving only around 22,000t in stock after a whopping 80,242t were sold earlier this week.

The minimum sales prices have been rising since last July, now practically matching fresh Dutch and German spot quotes for feed grade powder.  At €1554, the most recent minimum accepted price was about on par with the EU average spot quotes for feed grade powder quoted for 9th January 2019.

Based on EU MMO data.

With very strong SMP exports out of the EU in 2018, all SMP price quotes are also on the up, from EU market averages to GDT trends, as are forward indicators such as spot quotes and futures. Now that intervention stocks have dropped to below their March 2016 level, will we see a continued recovery in SMP prices, and a rebalancing of the butter/powder prices to more “normal” levels? GDT SMP prices have been rising steeply in the last three auctions – albeit from very low prices – to a level of US$ 2,200 last seen in June 2017.

Source: GDT

European spot quotes for food grade SMP have also improved consistently in recent weeks, with Kempten (German), France Agrimer and Dutch PZ quotes now at €1830/tonne.  We are even hearing anecdotal trade at prices nearing €1900/t.

This is happening at the same time as significant sales out of intervention for what must by now be feed grade SMP are reaching prices that are on par with fresh feed grade product spot prices.

On 9th January, the Dutch PZ spot quote for feed grade powder was €1580/t, while the German (Kempten) quote was €1550/t – about the same as the most recent minimum intervention selling price.  While the spot market trends suggest where average market returns will become in the short term, futures deal with the medium to longer term trends.

Even futures markets are looking up for SMP, with latest EEX quotes suggest prices rising above €2000/t by the end of 2019.

Average EU market prices also reflect this same trend. In the first week of January 2019, they reached €1730/t.

It is also the improvement in the spot and market prices of SMP which caused the December Ornua PPI to increase from 104.9 points to 107.5, equivalent to a milk price of 30.55c/l + VAT (32.2c/l incl VAT).

Source: INTL FCStone

Source: EU MMO

Returns from other products, apart from whey and Emmenthal cheese, are easing

It is important to state that, while many bemoan just how much butter prices have eased since the vertiginous peaks of 2017, at around €4300 (spot) and €4450 (early January average EU price), they remain significantly above the average of the last 10 years.

This is however a significant reduction in the last 15 months, and one which has yet to be fully offset by still historically weak SMP prices, at least relative to the old equilibrium which used to prevail between the prices of those two products.

Based on EU MMO data.

Whey prices have started firming in recent weeks, with spots at €790/t – though the latest available market prices for December 2018 suggested better prices than that, around €840/t.

Whole milk powder and the main cheeses, except Emmenthal,  have also experienced price weaknesses in recent months, as shown by the graph below.

Source: INTL FCStone

Based on EU MMO data

Demand outlook for 2019?

Geopolitical factors including Brexit, international trade and tariff disputes driven by the Trump Administration and concerns over the global economic growth are all worrying economic and trade commentators.

These concerns certainly affect dairy market sentiment to a point.

However, lower supplies in the EU, which have dipped into negative territory over the autumn, have continued to moderate output growth expectations from the bloc.  The EU Commission reports a likely production increase of 0.8% for 2018 over 2017, and predicts only 0.9% increase in 2019.  Their long term prediction is for moderate growth of 0.8% per annum to 2030 as environmental factors become more of a restraint in Europe.

Predictions for global milk output growth for 2019 are for no more than 1% increase, a significantly lower level than seen through 17/18.

Key of course is the supply demand balance, and supplies have trended towards better matching demand growth in recent months.  However, we will have to see the extent to which the headwinds outlined above may moderate demand.

In its Quarterly Dairy Report published in December, Rabobank predicts “double digit” demand growth from China for dairy products, due largely to excessive production costs restricting domestic output.

Rabobank also expresses the view that buyers may be taken unawares by a more rapid than expected dairy commodity price recovery in the first half of 2019, based on relatively low privately held stocks, all the more so now that the intervention cupboard is getting very bare!

Domestic dairy demand in most of the developed world remains solid enough, especially for butter and cheese which tend to be traded more domestically than on export (Ireland being an exception to this rule for obvious reasons).

Oil revenues for some emerging countries will have suffered in the last few months as crude oil prices went from near $80/barrel to around $55-60 today, and this will undoubtedly play a part in their food import affordability.

The long-term demand outlook – which looks beyond the shorter-term geopolitical difficulties outlined above – remains very positive, with global population and income growth in emerging countries expected to continue to drive dairy demand growth, in the context of more moderate global output growth.

So, stability on milk prices is well justified for now, but could we see justification before long for more positive moves by our milk purchasers?  Who knows?

CL/IFA/11th January 2019


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