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IFA President Joe Healy said the EU Commission’s announcement on greater price transparency as part of bringing greater fairness to the food chain is another important step in the campaign to give farmers a bigger share of the final consumer price.

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Commenting on today’s (Tuesday) decision by Lakeland and Glanbia to hold their milk prices for the milk produced by farmers in April, IFA National Dairy Chairman Tom Phelan said it was important that, for the next few months, co-ops would adopt a more positive mindset on milk prices to reflect improved markets and help with the increased cash flow needs of dairy farmers.

“The National Dairy Committee has engaged in a major lobbying exercise for April milk in every co-op area.  It is quite remarkable that, bearing in mind the amount of talking down of milk prices coming from some co-op management teams and boards, the first two co-ops to announce their milk price have decided to hold.  A more positive move would have been to declare the end of cuts, too,” Mr Phelan said.

“In light of lower global supplies, stronger Oceanian dairy price trends as shown by last week’s GDT auction, and improved EU and international powder prices, exemplified by the lift in the Ornua PPI milk price equivalent to 31.6c/l incl VAT, co-ops can and must, switch towards a more positive approach on milk prices from now on,” he concluded.

A turn around for the better?

EU powder prices reported by the EU MMO and average spots in the Netherlands, Germany and France have resumed their increase.  SMP spots have now broken the €2000/t barrier, with average EU prices close behind.  Butter prices, on the other hand, are somewhere between stable and slightly easier.  On the international stage, GDT is on its 11th consecutive positive auction.

Is global scarcity impacting prices?  Is intervention SMP finally working its way through the market place, after leaving EU stocks in recent months?  Is the kicking of the Brexit can to next Halloween at least buying us time of normal trading conditions, at best making a crash out Brexit less likely?

Improved prices

One thing for certain: all the indices industry watchers monitor are on the up.

To start at home, the Ornua PPI for April has lifted from 104.1 points for March to 105.9 points.  This is equivalent to a milk price of 30c/l + VAT (31.6c/l incl VAT), an increase of 0.6c/l on the previous month, and a little more than many of the main milk purchasers have been paying for March milk (see graph below).

Source: Ornua

The average EU MMO prices for week ending 5th May saw increases in milk powder prices, and a slight settling of butter, cheese and whey powder.  The upshot is that the returns for the notional Irish product mix in the table right is 36c/l before the deduction of processing costs.  Assuming our usual notional 5c/l, this would be equivalent to 31c/l + VAT or 32.67c/l incl VAT.  Again, 1 or 2 c/l above what the main milk purchasers payed for milk in March.

Based on EU MMO data

Other indicators have also continued to improve, not least GDT prices, with the auction platform registering last week its 11thconsecutive positive index movement, but also European spots and futures.

The GDT index is now 28.4% up on last November, with the most noticeable element the continued improvement in SMP prices, to a current level of $2521/t.

Source GDT

EU Spot prices have shown a recent resumption of SMP price increases, perhaps suggesting that SMP stocks sold out of intervention have by now mostly been absorbed in the market place.  Latest EU spots showed SMP breaking the €2000/t barrier, at €2023.  Butter prices are settling around €4150-4200 for the moment, with whey powder slightly weaker.

Source: INTL FCStone

As to current expectation of September 2019 prices from the EU futures markets (EEX), they predict a butter price of around €4370/t – slightly less than recent weeks’ expectations – but a SMP price of around €2,200, slightly up on previous results, and 10% above current spot market quotations.

The table below shows that the combination of those futures prices would yield a notional price of just over 34c/l + VAT.

What underpins the stronger prices?

We’ve seen for a number of months now that global milk output has grown by a lot less than expected, and crucially at a lesser pace than demand is growing.

Supplies of milk in the 7 most important export regions (EU, US, New Zealand, Australia, Argentina, Brazil and Uruguay), as reported by Rabobank in its Q1 2019 Dairy Quarterly Report, grew by a mere 0.1% for the first quarter.

The main reasons have been weather – drought and other inclement events –  and price related – producer prices have been falling in the last year, and no longer cover costs in many regions.

For the EU, Rabobank expect milk supplies to only start picking up in the second half of the year – which will be well past peak.

Source: Rabobank 2019 Dairy Quarterly 1

In the US, supplies are challenged also by economics, and prospects are poorer due to international trade challenges, especially caused by the Trump administration’s approach to trade with China.

New Zealand March milk supplies fell a dramatic 7.5% (9% for Fonterra), with Rabobank predicting lower growth for the rest of the season due to moisture deficit encouraging farmers, especially in the North Island, to dry off earlier.

In South America, production is on the up, but prices are poor, and local demand challenged by difficult economic conditions.

Finally in Australia, production is continuing to fall as margins continue tight despite some improvement in milk prices.

In China, imports have continued strong, with double digit growth expected for all of the first half, possibly more moderate in the second half.  Disease has cut back significantly pork production, which is both good and bad from a dairy consumption perspective: pigs consumer quite a bit of whey, so imports of that commodity will likely decrease.  However, pigmeat being one of the most important sources of protein for Chinese consumers, alternative protein, including dairy, will see an increase in consumption as pigmeat gets scarcer.

The recovery in the supply/demand balance has been further favoured with a rapid disposal of SMP out of intervention stocks. A total of 378,600t were sold since sales began (very, very slowly!!) in December 2016.  Most recently, 33 tonnes were sold on 16th April at the maximum offered price of €1660/t, leaving 1106t for sale at the next tender of 21st May.  What is left of the stock is held in Spain (510t), the UK (389t) and Slovakia (207t).

For some time, however, the view among commentators was that though the product was being sold out of intervention, it was taking time for it to be absorbed by the market, and therefore it continued to influence and restrict price increases for the fresh product.  It does look now like that effect has come to an end.

Source: EU MMO

So, should we see better Irish milk prices soon?

Logic would suggest that we should.  And this would be particularly important as peak milk production months are now upon us, and those larger milk cheques are critical to every dairy farmer in dealing with the still outstanding bills incurred during 2018.  While many co-ops provided much appreciated support in merchant credit facilities, rebates and even fodder imports when it was so badly needed, those bills must now be paid.  Farmers need every possible cent for the milk they produced last month, and for what they will be producing over the summer.

In the graph below, we compare the prices paid by the main co-ops for March 2019 as recorded in cents per litre in the Farmers’ Journal Milk League, and we compare them with some of the most relevant indicators we have already reviewed.

Some are paying less than the Ornua PPI, and only the West Cork Co-ops are matching (more or less) the current EU spot prices’ returns.

Sources: Irish milk prices from Farmers’ Journal March Milk League; various other indicators as per table above.

 

IFA National Dairy Committee Chairman Tom Phelan said a huge level of anger was building up among Glanbia suppliers over milk price.  He said Glanbia was the only milk purchaser to have cut their pay-out to farmers in both February and March, and was firmly last in the March league.

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Price stability justified for 2019

With subdued global milk supply growth, empty SMP intervention stores, a Brexit threat delayed well past peak and reasonable demand from China and Asia, all indicators point to stable dairy market prices after some earlier easing – which should spell stable milk prices.  So, why should co-ops at this point commit to no further milk price cuts for 2019?

Supply growth negative in February

Worldwide milk production by the main exporting nations has gone into negative territory in February (see graph right).

This reflects the continued severe downturn in Australian supplies (down 12.6% for February, and by 6.4% for the June to February period).

Also down are EU supplies: for the combined January and February period, they were 0.6% down in volume, with Germany, France and the Netherlands well back.  Exceptions worthy of note are of course Ireland and Poland.

US output was only up 0.2% for February, and growth there, which had been between 1.5% and 2% every month, year on year, has been much more subdued in recent months.

New Zealand had been forging ahead strongly through their October peak.  However, it started the calendar year in reverse, with February supplies down 0.12%, and March supplies well back by 7.4%!

With global output growth stable to negative, markets have taken good note of likely scarcer supplies later this year – which has translated most clearly into 10 consecutive positive GDT auctions, the last one earlier this week.

Source: USDEC

In their Quarter 1 Dairy Quarterly report, Rabobank do expect that lower output growth will remain the form for much of 2019, and they even go so far as to suggest that low growth might persist into 2020.  The main reason they give for this is the fall in milk prices over recent months to levels in most countries below production costs.

This expectation leads them to forecast stable milk prices for the first 2 quarters of 2019, possibly followed by some price improvements from the end of quarter 2.

Source: Rabobank

SMP intervention stocks empty

After the last sale of SMP out of intervention on 16th April, 33 tonnes at a minimum price of €1660/t, there is now only 1106t left for sale.  All of this will be made available for tender on 21st May.

A total of 378,504t have been sold out of intervention since the sales began in 2016.  With only just over 1000t left, stocks are quasi empty.  However, it is likely that some of this product has still to be absorbed in the market place.

Based on EU MMO

GDT scores 10 consecutive increases

Since early December 2018, all 10 GDT auctions have scored positive index increases, the latest one on 16th April at +0.5%.

The index has increased 28% since late November.  Butter prices, at US $5544/t are almost €800 dearer at current exchange rates than the most recent average EU butter prices.  SMP is almost €300/t dearer than EU product prices.  As a result, the latest SMP and butter prices would yield an “Irish” milk price of 36.32c/l + VAT.

Source: GDT

EU powder prices stable to firmer since January

There has been a divergence between price trends in GDT and global international markets, which have seen strong growth in butter and powder prices, and EU prices.

EU butter prices have been slipping early this year, yet remain above €4000/t, and so at historically high levels.  Whey powder prices have also been slipping somewhat.

However, SMP and WMP has both been firming since January, reflecting strong exports and the emptying of intervention stocks.

Cheddar cheese prices have been stable to slightly firmer, despite the Brexit fears.

 

Based on EU MMO

Brexit threat postponed, but…

After two deadline postponements for Brexit from 29th March to 12th April, then to 31st October, the reality is that the possibility (never to be excluded) of a hard Brexit has been postponed to a date beyond peak milk production.  This is positive in that the trading conditions (no tariffs, no delay or paperwork at the border…) remain unchanged for longer than might have been the case with a no deal crash out this spring.

However, we hear from cheese traders that, with significant stockpiling ahead of the first 29th March deadline, and with strong increases in UK milk (+2.7% for February) and cheese production (+2.7% in the last 12 months), freshly produced UK cheddar is now competing with stockpiled Irish.  Quite a bit of retail promotions (i.e. competition based on reduced prices) is being reported.

Oil prices strengthening importing countries’ purchasing power

Since January, the Brent crude oil price has moved from around US$63 per barrel to a current US$72.

Higher oil prices always correlate to stronger dairy prices, because they increase the export earnings of many of our customer countries, such as the Middle East, North Africa and the likes.

With the trend currently up, this coincides with other factors to suggest better or at least more stable dairy prices over the coming weeks and months.

Massively increased EU powder exports – SE Asia, MENA and Africa feature strongly

EU SMP export for Jan/Feb 2019 were a whopping 37% above exports for the same period last year.  This follows a full year performance up 5.4% in 2018 compared to 2017.

China, which has imported 172% more powder in Jan/Feb 19 than in the previous year, is closing in on Algeria as our main market for SMP, but all the main destinations of SE Asia, the Middle East and Africa above and below the Sahara have clocked up massive increases into the early months of 2019.

Source of both above: EU MMO

Cheese exports for the same period were strongly up too, by 7% compared to the same period last year.

This follows a historical year in which 832,000t of cheese were exported from the EU, the highest level in at least 7 years.

Demand from China continues strong

China is predicted by Rabobank in its 1st 2019 quarterly dairy report as remaining a strong feature in international dairy demand.  Domestic supplies will remain short of demand, and Rabo predicts accelerated import activity in the second half of the year.

Source: CLAL.it

Return levels would justify holding milk prices – and co-ops must signal end of price cuts for 2019

The current average milk price paid by co-ops for February is around 30-31c/l + VAT.  The returns for the main indicators outlined below about match this.

With farmers in need of every cent, as peak month cheques arrive, to catch up with the massive bills accumulated in 2018, it is essential that co-ops would signal clearly to farmers that this is the end of milk price cuts for 2019.

 


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