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.
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.
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.
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
19 12 2018
IFA National Dairy Chairman Tom Phelan said the decision by Aurivo, uniquely among co-ops, to cut their milk price for a second month running was a real let down for their suppliers, at a time when markets and the outlook for 2019 justifies price stability.
Some real positives on dairy markets for early 2019
1. Less milk about
Global supplies of milk have continued to grow into October, but, at an estimated +0.6%, this is at a very much more modest pace than heretofore.
Weather related fodder shortages and cost shocks continue to impact EU (-0.4% in Oct; +1.4% ytd), and Australian (-5.7% in Oct, -0.6% ytd) output.
While the US continue to show positive growth (+1.1% ytd), it is relatively modest at +0.8% for Oct.
Of the main dairy regions, only New Zealand is motoring on, up 5.8% for Oct, and up 2.2% for Jan-Oct.
Slightly less important in tonnages produced is Argentina, though Oct supplies were +2.1% – compared to a low performance this time last year – and ytd + 5.6%. Brazil was down 0.2% Jan-Sept.
European supplies, while well down on the whole for October, show a mixed picture when one look at individual producing countries.
France, Germany and the Netherland account for, between them 46% of the EU’s milk supplies, and 51% of its dairy exports. Those three countries are all producing less milk this back end than last year, the Netherlands at least to end the year with less milk than 2017 – France produced 4.4% less milk in October, Germany -1% and the Netherlands -5.5%.
UK milk supplies were practically static at +0.4% for October, despite very strong growth in Northern Ireland, suggesting lower output in the rest of the UK.
Finland reported losing 50% of its grass crop to the drought over the summer, so that production will be down 0.5% this year and the Finns predict it will fall a further1.1% next year.
Austria’s milk supplies are also down, and the Italians expect their milk production to fall in the last quarter of 2018.
Supplies from other countries, on the other hand, have staged a recovery after the heat wave and drought of the summer. Ireland most of all increased October production by 20.1%, raising January to October output by 2.8%, with expectations of further significant growth in November. Denmark is also showing some growth, while Poland continue to grow production by over 2% ytd.
2. A turnaround in GDT trend?
Today’s GDT auction was the second positive one after a long stretch of price falls since last May. Are we seeing a turn-around? NZ supplies have increased massively in recent months, but we are now well past the NZ peak, and ahead of the Northern Hemisphere main season. Concerns over slower and even negative supply growth in the short to medium term is clearly influencing even Oceanian price trends.
At US$3928 (€3454/t), the average GDT butter price is up 4.9% on the previous auction, but remains well below current EU average butter prices. At $2042/t (€1796), GDT SMP prices are a little above rising EU levels.
3. More SMP selling fast out of intervention at rising prices
SMP has been open for buy-in since 2014, in the wake of the Russian embargo on all EU foodstuffs. A total of over 405,000t was sold into intervention between 2015 and 2017. There was no SMP accepted into intervention in 2018, and after a couple of unsuccessful tenders, operators got the message and stopped offering it in.
In 2016, 40t of SMP were sold out. In 2017, this increased to a still modest 180 tonnes. 2018 saw the bulk of the sales, with 276,883t sold out by the last December 2018 tender. From October, the number of monthly tender was doubled to 2, though December had only the one.
Next January, the totality of what is left in stock namely just over 102,000t, will be available for the next two tenders.
EU Agriculture Commissioner Phil Hogan has seriously suggested that the entire stock could be gone by next spring.
The most interesting aspect of the intervention sales is how they have increased in pace while the sales price has also been increasing.
Based on: EU MMO data
4. Rising fresh SMP market prices
SMP prices have been firming progressively since mid-October, coinciding with the largest sales out of intervention (see graph above).
As at 9th December 2018, the EU MMO reported the average EU SMP price at €1670/t.
Spot quotes for SMP have also been increasing steadily for the last couple of months. On 12th December, those had exceeded the intervention buying in level and exceeded €1700/t for the first time in months.
Based on: EU MMO data
Source: INTL FCStone
Quotes for feed grade SMP have also been improving over the same period (see graph below). It is fair to assume that the sales out of intervention cater mostly to this market. And the minimum price reached in the December sale was very much on par with the type of prices currently being paid for the fresh product.
Source: IEG Vu
5. Demand somewhat flat currently but looking to improve in New Year
Demand growth had been assessed at around +1.5% earlier this year. Lower oil prices, trade tariff disputes and weaker economic growth in many regions has flattened it a little in the last quarter of the year.
However, Chinese demand has increased in the earlier part of 2018, and is expected to increase in 2019 also.
Rabobank predict that, in 2019, Chinese demand will increase in double digits. The cost of production is rising in China, with feed costs on the up partly as a result of the tariff/trade war with the US. Chinese economic growth is however somewhat uncertain and this will impact demand for additional imports. Even allowing for this, however, Rabobank predicts an increase in Chinese dairy consumption for 2019 of 1.5% year on year.
In South East Asia, powder demand (including casein) has increased after a poor start to the year. Butter and cheese imports have also increased, though from low levels.
Rabobank predict that the relative global production squeeze is set to continue into 2019, and bearing in mind relatively low levels of privately held stock – also fast shrinking SMP intervention inventories – and continued steady demand, they say there is a real risk that buyers may get caught out with the market “moving quickly upwards and catching them unawares” in the first half of the New Year.
6. Not all rosy: Brexit, oil prices, international tariff wars
As 2018 comes to a close, there are some headwinds.
Brexit Day, 29th March 2019, is just over 100 days away, and the British, Irish Governments and the EU are now openly talking about preparing for the UK crashing out without a deal (a Hard Brexit).
It is worth reminding ourselves of a few dairy facts when it comes to our trade with the UK.
The UK imports 476,533 tonnes of all manners of dairy products from Ireland, but most of all cheese (138,000t) including a majority of Cheddar, and butter (49,000t).
They also export around 936,520 tonnes of dairy products to Ireland – this is mostly raw liquid milk from Northern Ireland which is being processed in the ROI.
So, firstly, the value of the UK imports from Ireland exceed its exports in value terms; and secondly, there may not be sufficient capacity within the UK to process the NI milk which is currently being processed in the ROI.
Hence, to quote the CLAL presentation from which the graph right and the information above is sourced, “Aside from political considerations, market equilibrium calls for the existence of a free trade agreement between the UK and the EU in order to limit the effect of Brexit on the constituents of the supply chain”.
The most immediately apparent negative impact from the political chaos and uncertainty surrounding Brexit development is the weakness of Sterling. It makes our exports less competitive, and makes UK/NI milk cheaper to import, playing into the hands of retailers intent on unsustainable discounting, especially around Christmas as we have seen this week with fresh vegetables!
Oil prices had risen very significantly during 2018, increasing export earnings for many emerging countries which rely on them to import their food necessities including dairy products.
In recent weeks, increased supply and the fear of economic headwinds potentially reducing demand has impacted crude oil prices, which have fallen dramatically to levels last experienced over 12 months ago.
Crude Brent oil went from US$87.54/barrel on 3rd October to around US$58-59/barrel in early December.
While Saudi Arabia is believed to be unlikely to risk upsetting the US by pushing too hard for OPEC output restraint (which would push up oil prices), Rabobank and other analysts nonetheless expect 2019 oil prices to average out in excess of 2018.
International tariff wars have also increased uncertainty on global markets. Trade tariffs imposed by the US on China in particular have increased the cost of feed, and consequently the cost of milk production. Paradoxically, this will, according to Rabobank, mean increased dairy imports in 2019. Recent attempts at thawing out commercial relations between China and the US have resulted in some import concessions on US soya – but whether those suffice to improve Chinese production costs remains to be seen.
7. Where are the main price indicators?
The below sums up the main indicators, many explored in some detail above, to assess what they indicate by way of milk price equivalent levels. It is clear that, despite the last two positive auctions, the GDT levels still reflect significantly lower returns than EU indicators, showing a continued differentiation between markets.
That said, it is noticeable that the various indicators, all of which are quoted below before 5.4% VAT is added, remain close to prices currently being paid by the main milk purchasers of around 30-31c/l. This continues to prove our point that stability in farmgate milk prices, at worst, for the next few months at least, is a very sustainable and legitimate expectation from farmers!
Based on data from: EU MMO, INTL FCStone, CLAL.it, Ornua, GDT
While Brexit and international trade wars are creating some uncertainty, IFA National Dairy Chair Tom Phelan said there were many signs that dairy markets will be tighter and prices firmer into the spring of 2019. The Rabobank last Dairy Quarterly report for 2018 even says that dairy markets could move quickly upwards and catch buyers unaware in the first half of 2019. This, Mr Phelan said, should encourage co-ops to hold milk prices at current levels till spring.