Latest Dairy Market Blog
IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.
[vc_row][vc_column][vc_column_text]6th consecutive positive GDT auction sees continued butter/SMP recovery
In an encouraging SMP prices have continued to recover in this week’s GDT auction, increasing by nearly 8% over the previous event.
Butter prices, which have been on the up for the last few months, also continued to push upwards, with a 3.3% increase over the average price reached at the previous auction.
Taking the new increased SMP and butter prices, we calculate a farm gate price equivalent at Irish constituents of 34.05c/l + VAT (35.9c/l incl VAT).
WMP prices eased, with a 2.9% decrease over previous event. This new reduced price would yield an Irish milk price equivalent of around 29c/l + VAT (30.5c/l incl VAT).
The downturn in the WMP price is what kept the overall average price index increase as low as 0.6%, because by very far the largest quantities of product traded through the auction is always WMP, followed by SMP.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: GDT[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Ornua PPI reflects improved butter returns into May
The Ornua PPI increased 1.8 points for May trade, to 106.8 points, equivalent according to Ornua to a milk price before VAT of 30.36c/l (32c/l incl VAT), after deduction of their 6.5c/l processing cost estimate.
This reflects improved butter returns during the last month, and seen as SMP prices have also been improving, it is not unreasonable to expect that those may be reflected later on.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]SMP intervention less of a factor?
The strong increase in GDT SMP price is also reflected in EU average and spot prices. This is despite the fact that 350,000t of EU intervention SMP continues to overhang the market. The Commission’s determination not to sell below market price has meant only 40t were ever sold, back last December! This has clearly paid dividends, as average EU prices are now close on €200/t above intervention buying in levels (see below)
We saw a return to modest levels of buying in from late March , with 7,900 t bought in between 27th March and 21st May. Few countries were involved: Lithuania, the Netherlands, Germany, the UK and Poland. This compares with up to 15,000t per week at peak this time last year!
Also, the last week of May saw an end to intervention buying in, as prices continue to recover.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU dairy prices continue to rise
At €4,850/t for the week ending 28th May 2017, Average EU butter prices have increased massively to historical highs unprecedented in the EU MMO archive of average EU prices, which starts in 2001.
For the last few weeks, the EU MMO has been reporting steadily increasing prices for all the main commodities, as per the graph on the right.
While butter prices have been strong for several months by now, powders had been slow to pick up. However, both SMP and WMP have improved significantly since late April – by +7.4% and +6.6% respectively.
Overall, the returns from average dairy product prices as reported to the EU MMO as at week ending 28th May would, for a representative Irish product mix, yield a gross 38.52c/l, or allowing for a 5c/l processing cost deduction, a milk price equivalent of 33.52c/l + VAT (35.33c/l incl VAT).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU production rising – but relatively slowly as we pass peak
EU milk production has been rising: while remaining below last year’s levels still, the gap has been narrowing. The January to March period saw a decrease of 2.3% overall, and FCStone International estimate that April EU output, overall, will be down only 0.1% in April.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]More recent trends suggest that higher temperatures than average and moisture deficits in April and some of May have affected output in Northern Spain, France, Germany, the UK and the Netherlands – at least.
Spain, which was down 0.29% for the Jan-Apr period scored a 2.3% increase in April. France is back 4.17% for the year todate, with a March decrease of 1.24%, and a 4.5% downturn in the 3rd week of May. The same week in Germany saw a decrease of 3.7% (Germany is now past their peak). April output in the UK saw no change compared to April 2016, but with a positive (+4.1%) for Northern Ireland and a small negative (-0.8%) for Great Britain. Belgium, which had increased production significantly in 2015/16, is now well down, by 2.22% for April. Relative to its milk output, Belgium was one of the largest contributors of SMP into intervention in the last year.
Poland, also a very dynamic milk producer in the post quota era, increased April production by 4.1% year on year, by 7% on a 3-year average, and 12% on a 5 year average. Production for the first four months of 2017 was up 3.63%.
The lower milk output is naturally being reflected in lower tonnages of certain products being processed, especially SMP (-9% for Jan-Mar 17 compared to 16, and 3.9% down for the full year April 16 to March 17) and butter (-4% for first quarter and -1.5% for the full year) – both of which are undoubtedly impacting price levels.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
In recent weeks, there have been reports of European processors reducing prices somewhat. This is in the context of weaker dairy commodity prices in February/March, and milk price decisions being made in most countries for the month(s) ahead, not in retrospect as is the case (uniquely) in Ireland.
Arla cut their April price by 1c/l, though Arla UK held for April and reduced their May price by 0.8ppl, Mueller also cut their May milk price – both causing much anger among UK dairy farmers.
Since March/April, however, as we have shown above, volumes of milk have been relatively slow to build, the determination of the EU Commission not to undersell intervention SMP has been well and truly proven, and strong demand in developed and emerging countries, especially for butterfat and cream, has sustained further commodity price improvements.
Fonterra have not only increased their final forecast price for 2016/17 to NZ$6.15/kg MS, but have also announced a higher initial 2017/18 forecast of NZ$6.50/kg MS.
The outlook for milk prices in the early summer is positive. We have demonstrated that there is scope for further increases, and IFA has been urging co-ops to lift the May milk price by up to 2c/l.
With a current (April) milk price averaging 30c/l (at 3.3% protein and 3.6% butterfat, not including VAT and based on the heavily West Cork influenced Farmers’ Journal League average), we contend that 32c/l + VAT (33.7c/l incl VAT) is fully justified as a new average for May milk!
FCStone International predict a March reduction in EU supplies of 0.19% – a narrowing in the gap with previous year’s supplies. However, during April, a cold and dry spell over Northern Europe subdued the recovery of German, Dutch and French milk supplies, and now the European peak is just behind us. Also, the herd reduction scheme in the Netherlands will continue to reduce their capacity for this year.
While the gap with last year’s supplies has tightened, it is doing so more slowly than expected, and EU milk output appears unlikely to spill into larger volumes than 2016 until later this year (see global output below).
Intervention stocks of SMP (350,000t) remain an overhanging concern. Also, while buying-in has resumed, the quantities have been very much more modest than this time last year, totalling 6,554t for 6 week period ending 7th May, versus an average of 15,000t/week at this point in 2016. Also, SMP processing is down by over 9% in the first two months of 2017 (see graph right), and down by 3.3% in the period from April 16 to end February 2017. With this trend is continuing, fresh SMP availability is now below demand. Hence while the high intervention stocks and buying in remain influential in buyers’ assessment, it is clear that shortages of fresh SMP could be an issue later this year.
Dairy commodity prices are firm for butter, whey and cheese, weaker for powders – but in recent weeks in the EU, all dairy prices have increased (see below).
All in all, it seems we have the ingredients for medium term stability, at worst.
Theo Spierings, CEO of Fonterra, in recent days even predicted 3 years of stable milk prices for New Zealand farmers! That’s a longer horizon than I would consider, as so many things will happen over those three years, not least for us Brexit![/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Global output growth about to tip into positive – but EU growth slower
The monthly data dashboard published by the US Dairy Exporters Council (USDEC) shows that March global output is coming much closer to last year’s levels – as a result of continued strong increases in US production (albeit more modest than in February), and NZ output moving from negative to positive territory and rising significantly in that month (by more than 9%) – however it does not take account of the weather effect suffered in New Zealand in April, for which month no statistics are as yet available as we write.
EU production continues below previous year’s levels, at an estimated 0.19% below March 2016.
Dutch milk production are reported down 0.41% for April – a real change in trend for this dynamic dairy producing country, and reflecting some of the impact of the herd reduction scheme. French milk output for April was down 1.68%, with recent weeks’ production affected by a dry spell. German collections for the first quarter of 2017 were down 4.43%, with April supplies estimated by FCStone International to be down 3.4% on April 2016.
On the other hand, UK milk output, which was down 1.5% in March 2017 compared to the same month in 2016, run 1.2% above prior year in the weeks from mid-April.
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk output estimates March, and Jan to March 2017
The GDT auction today (16th May 2017) belied expectations which, based on mixed to negative futures trades in recent days, suggested a poorer performance from WMP especially.
Butter motored on with a price increase of 11.2% compared to the previous auction, as did AMF, up 8.2% – showing a continued strong performance from butterfat.
1% and 1.3% for SMP and WMP respectively is not huge, but it speaks of buyers’ concerns over availability of the product over the coming months, as flagged above.
This auction’s average SMP and butter prices of US$1998/t and US$5479/t respectively would return gross (before processing costs) 37.87c/l, or a farm-gate equivalent price of 32.87c/l + VAT (34.64c/l incl VAT) after 5c/l processing costs are deducted.
Milk output in New Zealand could be negatively affected for a second season in 2017/18 (it fell around 3% for the season which is just ending).
Cyclone Cook and Cyclone Debbie have caused significant flooding and infrastructural damage to pasture in the dairy intensive parts of New Zealand’s North Island. Whether this will impact the 2017/18 season, which starts next month, will depend on how the rest of the New Zealand winter weather pans out.
The longer term prospects of expansion in New Zealand have been cast into doubt by recent statements from the Minister for Primary Industry Nathan Guy, who suggested that the industry would have to rely on increased value rather than volume, as the type of increase in cow numbers of the last 40 years (from 2.9m to 6.5m) could not be sustained from an environmental perspective.
EU dairy commodity prices rising
In the last couple of weeks, all EU average dairy prices reported through the EU Milk Market Observatory have risen, some significantly. SMP increased €40/t in the most recent two weeks, as did WMP. Butter in the same period rose by €80/t, Cheddar cheese by €30/t and whey powder by €20/t, reaching €1,000/t for the first time in three years.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on: EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy returns on the basis of these prices have lifted back up above 36c/l gross (before processing costs are deducted). A representative Irish product mix would, for the average EU dairy prices for the week ending 7th May 2017, amount to a gross 36.4c/l, equivalent to a farm gate price of 31.4c/l (assuming a 5c/l processing cost), or 33.1c/l including VAT.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on: EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]International price trends also reflect strong butterfat and weak powder
The world market reflects exactly the weaker prices of powders and much stronger price trends for butterfat being experienced in Europe. Many commentators have remarked on the fact that the price gap between the two was at a record high.
The reason for the high butter prices lie in the much stronger demand both in Europe and the US which is reducing both blocks’ export availability. Butter consumption in the US has increased by 22% in the last 20 years, benefiting in recent times of the more positive health related messaging around butter consumption.
From the two graphs below, it is interesting to note how SMP and butter prices from the EU, the US and Oceania have converged in recent weeks.
SMP prices in US$ per lb
Butter prices in US$ per lb
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Even more good reasons to remain ambitious for 2017 milk prices
In our May 2017 Dairy and Liquid Milk Newsletter, we listed 10 good reasons why co-ops should remain ambitious for milk prices in 2017. The latest dairy market news in this blog, if anything, reinforce that view, so it is worth reminding ourselves of the 10 good reasons, refreshing a few of them along the way:
- After an estimated 3% fall in the 2016/17 New Zealand output, the new 2017/18 season to start next month is being questioned as a result of pasture-damaging April storms.
- The Netherlands, the most dynamic EU country for milk expansion, are cutting production capacity this year to reduce phosphates. In the largest dairy countries of the EU (France, Germany) supplies remain below last year with milk prices still below production costs.
- SMP is again being sold into intervention, but the quantities are modest (6554 t since the end of March). A far cry from over 15,000t/week this time last year!
- Fresh EU SMP supplies are down: processing has fallen back on year-earlier since last June, and fell 9.1% for the Jan-Feb 17 period, and down 3.3% for the April 16 to February 17 period. Shortages of fresh EU SMP would help change the perception of intervention stocks.
- SMP spot prices, while just above intervention levels at around €1750/t, have increased by €20 to €40/t in the first week of May. EU average SMP prices increased €40/t to €1790/t in the last two weeks.
- Average EU butter prices breached €4000/t last October, rising again in recent weeks, to a current EU average of €4390/t.
- As well as butter, all the main commodities relevant to the Irish product mix have seen price uplifts in the first week of May, to a milk price equivalent return of 31.40c/l + VAT, or 33.1c/l incl VAT.
- Five consecutive strongly positive GDT auction results with price increases for butterfat, WMP, cheese and casein suggest that international buyers are prepared to pay stronger product prices in the second half of the year (graphics above right). 16th May GDT prices for SMP/butter would return a farm gate price of 32.87c/l + VAT or 34.64c/l incl. VAT.
- Chinese and SE Asian dairy demand is vibrant. Rabobank reports insufficient domestic production in China with expectations that dairy imports will rise 20% this year. China prioritises EU origin imports for value-added dairy, especially infant formula, mostly from the Netherlands and Ireland. Those rose 19% in the first quarter of 2017. Vietnam, a populous country of 90m, 70% reliant on imports for its dairy supplies, is predicted to grow demand 7% per annum. Meanwhile, imports of EU cheese into Japan have increased 44% in Jan-Feb 17, while South Korea’s have risen by 39%.
- In South America, supplies fell 12.5% in Argentina (2016); by 1.8% in Uruguay (Jan-Feb 2017); 3.68% in Brazil (2016) with only Chile showing a small positive (+0.7% Jan-Feb). Those countries are now significant importers of dairy, just like Mexico, with domestic supplies well below demand.
Volatility is at play, but in the medium term, the factors above could actually promote improvements in powder prices in particular. Co-ops must bear those in mind in making the milk price decisions which will determine the most important milk cheques of 2017.
[vc_row][vc_column][vc_column_text]Powder prices weak, but are GDT, spots and futures predicting a recovery?
The last GDT auction last week (18th April) was the third consecutive positive auction, but probably most remarkable because it saw a recovery in the price of WMP (3.5%), and most of all SMP (7.1%) after dramatic SMP price falls in the last two auctions.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: GDT[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]NZ and European futures also appear to suggest some slight improvements in powder prices – just not quite yet, with uplifts available for July and August 2017 SMP trade, while WMP may do better in the shorter term for trade in May and June.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: NZX via Dairy Markets[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Spot quotes in the EU are showing stable to firming SMP with prices €10 to 30/t above intervention buying in levels. Prices had been stable for the last couple of weeks, and have firmed slightly in Germany and the Netherlands, while falling slightly in France this week. Butter is continuing stable to strong as are whey powder prices.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Meanwhile, the EU reported raw milk spot prices from Italy and the Netherlands have both stabilised at €33.8/100kgs and €31.0/100kgs respectively as at 23rd April 2017.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU average SMP prices have eased in recent weeks, as have WMP prices. At currently reported prices (26/04/17), an Irish product mix would return around 35.9c/l before processing costs, down around 1.8 c/l since the peak of early January. Still, this would comfortably justify the levels of farm gate milk prices paid by co-ops for March milk, which according to that month’s Farmers’ Journal Milk Price League, published today, average out at 29.9c/l + VAT.
Hence, any pessimistic talk around co-ops’ ability to sustain current milk price would be very premature indeed!
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Intervention buying in has resumed since late March, with a total of 2669 tonnes have been offered and purchased into intervention in the three weeks to 16th April, coming from Lithuania, Germany, the Netherlands and Poland, the only contributors thus far. A further 1,100 tonnes is reported to have been taken in this week (a far cry from the weekly quantities seen in early 2016).
While these newly bought in quantities are far more modest than the weekly amounts seen in early 2016, they come to join the 350,161 tonnes purchased during the 2014-16 period that remains in stock and continues to overhang the market.
The EU Commission has reiterated its view that product will only be sold out of intervention “at the right price”.
Ornua PPI unchanged for March
The Ornua PPI, which reflects returns for the mix of product traded by Ornua on behalf of its member co-ops for that month, remains unchanged for March compared to February. According to Ornua, this reflects lower SMP and butter price returns, combined with improved Cheddar and whey prices. Allowing for a processing cost of 6.5c/l, they tell us, this would be equivalent to a farmgate milk price of 29.8c/l + VAT.