Latest Dairy Market Blog
IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.
Global milk output growth dips in October
Overall, global milk supplies are estimated by AHDB UK to be up only 0.9% for October 19.
It must be noted, however, that solids are higher in most of those regions, and so volume (litres) based trends do not necessarily give a complete picture.
The US saw a return to the more normal levels of growth it has experienced in recent years, at around +1.3% per month for September and October, after a period of quasi stability. This is linked to improvements in margins at farm level, due to higher prices and lower costs.
New Zealand output which started the 2019/20 season very strongly, has dipped 1.5% below year earlier levels in October. Rabobank predict that, due to volatile weather conditions, the full season could be anywhere between -1% and +1% compared to the previous year.
Australia has continued on its negative trend, with October down 5.5% and the year-to-date output down 5.8%.
EU output growth has been relatively modest at 0.6% for the Jan-Oct period as estimated, though this reflects a continuous increase for the last 3 months, and +0.8% for October. Also, milk solids in the main European dairy countries have been strong. Ireland has increased supplies +6.9% after a 3.6% dip in October. The UK has seen production growth of 3% for the period, and a more modest 0.1% through September and October, Poland is up 1.9% and 1.3% for October.
Growth trend todate has been negative in France, where output fell 0.5% for the Jan-Oct period, but has been rising very modestly for the last 3 months (+1.1% in October), Germany was down 0.1% for Jan-Oct, with a 1.4% increase for October itself, and the Netherlands’ output was down 1.4% for Jan-Oct, but has been rising for the last 3 months, including a 2.0% uplift for October.
Future trends, however, suggest continued growth during 2020 for most of those countries (see graphic right). Rabobank’s final dairy quarterly report for 2019, however, suggests this growth would be modest, not exceeding 1% right out to the first quarter of 2021.
This would suggest a reasonable supply/demand balance for 2020, and therefore it is sensible to expect at least sustained or even further improved dairy commodity prices – provided global consumers are willing to pay the increased prices, which Rabobank warns us not to take for granted!
Interesting long term development: EU growing output, while NZ stabilised
First note is the difference of production scale in the two curves – New Zealand’s output (left axis) measures monthly volumes from zero to 4m tonnes, while the EU’s output (right hand axis) goes from 11m to 15m litres per month.
The first very obvious aspect is the counter-seasonality nature of our production patterns, more nuanced in the EU due to the variety of production systems and climates involved.
The second obvious trend is that, while output in NZ has pretty much stabilised, in the EU, it has been in a growing trend since the abolition of quotas – hardly a surprise, but obviously meaningful in terms of the EU’s contribution to global production and its relative balance.
Demand: China still strong but some global concerns
The European Union is increasing its exports of skimmed milk powder (SMP) to China, taking over as leading exporter from NZ which had been the main supplier in the period January – October 2019. Ireland is the main player, with volumes exported up 155% in October.
Of the SMP imported from China in October, 12% comes from Ireland! CLAL asks the question: is the competitiveness of European SMP price, compared to that of New Zealand, the main driver of this increase?
The Chinese New Year will come early in 2020, falling on Saturday 25th January, and continuing to boost imports, especially for powder products including infant formula. However, Rabobank reports that domestic milk production is on the up in China, with 2020 output to grow by 2%. As China is only around 70% self sufficient, this is not enough to reduce imports much, though Rabobank predict that the strong import activity in 2019 will not be replicated to the same extent in the first half of 2020.
EU exports to many other destinations have increased quite substantially during 2019 to October, as outlined in the tables below. The US has seen good growth in EU imports of butter (+26%) and cheese (+9%) – though this may change after the implementation of the new import tariffs imposed by the US on some EU butter and cheese (including Ireland’s) as a result of the Airbus/Boeing dispute adjudication by WTO.
We’ve seen good growth of butter exports to MENA countries and South East Asia, including Japan. On cheese, Japan again, Saudi Arabia, Canada and Ukraine have grown well, too.
Source: EU MMO
GDT comes into line with European powder prices
Global dairy price trends have shown a continuation of stronger powder prices – especially in Europe and the US – and stable to firm butter and cheese prices.
Key Results – GDT 17th December 2019
- AMF index down 0.3%, average price US$4,866/MT
- Butter index down 2.4%, average price US$3,886/MT
- BMP not offered
- Ched index up 1.7%, average price US$3,869/MT
- LAC index up 0.6%, average price US$787/MT
- RenCas index up 2.6%, average price US$8,260/MT
- SMP index down 6.3%, average price US$2,867/MT
- SWP index not available, average price not available
- WMP index down 6.7%, average price US$3,099/M
We are seeing the GDT powder prices coming nearer the European price levels – which themselves are relatively strong.
|SMP||Butter||Milk price equivalent returns of combination, in cents per litre of milk|
|EU avg 8th Dec 2019||€2500/t||€3680/t||33.78 c/l (net of processing costs and VAT)|
|GDT 17th Dec 2019||US$ 2867/t=
|33.55 c/l (net of processing costs and VAT)|
Judging from the European and New Zealand futures trends outlined in the graphs below, powder prices are likely on current trends to continue to firm slightly while European butter futures will likely to continue stable, maybe firmer towards spring.
Source of graphs: Ornua based on EEX and NZX
For the sake of comparison, we have copied below the most recently available indicators we normally monitor and their milk price equivalent, and where they were at in early August. The SMP/butter combination now returns 4.62c/l more, the full mix 2.68c/l more, EU spots for SMP/butter combo 4.91c/l more, futures 4.11c/l, while the Ornua PPI is up 0.95c/l – which is incidentally 1c/l including VAT. Eventhough the GDT has fallen in the last 2 auctions, the SMP/butter combo still returns 2.5c/l better than it dit in early August.
Boris Johnson now has a large majority in Westminster, and has obtained a vote in support the Withdrawal Agreement he signed with the EU earlier this year, which will see the UK exit the EU on 31st January 2020. This has been registered by financial markets as a (temporary) end to uncertainty, and therefore Sterling has strengthened significantly, to its highest in 3 years.
The UK will exit the EU on 31st January, and enter into a Transition Period of at least 11 months, till 31st December 2020, during which the future relationship (i.e. a trade agreement) will be negotiated.
In a recent move, the UK have made the 31st December 2020 deadline legally binding, which means we continue to face a potential cliff-edge no-deal Brexit on that date – resulting in a slightly weaker Sterling.
Experience suggests that achieving a trade deal, never mind a free trade deal (which should be close or equal to single market with regulatory alignment), in that time frame is highly unlikely. It remains to be seen whether Boris Johnson and his Government decide to soften their attitude after “Brexit is Done” on 31st Jan, now that they owe nothing more to the DUP, the ERG, the defunct Brexit Party, and that the newly elected Tory MPs in the traditional Labour regions get to represent the jobs and economic conditions so important to their constituents.
In practical terms, however, the ratification of the Withdrawal Agreement by the UK Parliament means 12 months from 1st Jan 2020 during which trading conditions will not change (no import tariffs, same regulatory environment, so no custom checks, delays and paperwork). The volatility of the exchange rate will remain, in reaction to events in the negotiation process and statements made by the British Prime Minister, the EU, or other prominent stakeholders.
There is scope for further milk price increases
With the disappointing exception of Lakeland, who were first off the blocks and chose to hold prices at the October levels, and the West Cork co-ops who have maintained a significant price lead throughout the year, other co-ops increased their November milk prices by between 0.25c/l (Aurivo) and 1c/l (most others).
Even allowing for this, it is clear that there remains scope for further price increases before spring, to fairly reflect in farmer payments the significant improvements in market returns.
The returns from the main indicators in the above table have, since mid August, increased by 4.2c/l for the EU MMO based full product mix return, by 2.68c/l for the butter and powder combination, by 4.91c/l for the SMP and butter spot quotes, and by 0.95c/l for the Ornua PPI.
Most co-ops have for the majority of the last 12 months payed milk prices below that level, though the Ornua PPI is representative of all product traded by Ornua on behalf of the said co-ops for the month.
In relation to other European milk purchasers, the Dutch LTO European monthly milk price review, in which Glanbia, Dairygold and Kerry are included also shows that Irish co-ops have been losing ground consistently since May 2018, disadvantaging Irish milk producers relative to their European colleagues. Not only have the 3 Irish co-ops been bottom of the review for several months, the gap between their price and the average of the LTO review has widened to around 4c/l since las August. The November increases will close some of that gap, but there is a way to go yet.
It is clear there is scope in market returns for improved milk prices. Farmers will need those before spring, when their volumes start to pick up, costs increase and milk solids plummet seasonally, reducing milk cheques.
ARE OUR CO-OPS SHORTCHANGING US ON MILK PRICES?
In the last 20 years, the mean annual protein content of the milk produced by Irish dairy farmers has gone from 3.2% to 3.5%, while butterfat levels have gone from 3.7% to 4.2%. Both constituents vary widely seasonally, with peak/trough differences of 0.6% for protein, and 1% for butterfat – the latter now unrestricted after the end of the quota regime.
Numerous co-ops have taken to quoting not only their standard price at 3.3% protein 3.6% butterfat, but also the price achievable in the relevant month at the co-op’s average constituents –especially so in autumn, when the constituents are at their seasonally highest levels.
Farmers have achieved those higher constituents through hard work, breeding, management and feeding, and have also grown volumes, also at a significant cost. They are frustrated to see their hard work being hijacked.
(Source of data in graph right: CSO)
- Co-ops have fallen behind the LTO average, and have not reflected the European
stable to firmer milk price trend in the last 6 months
Three Irish co-ops are included in the LTO monthly European milk price league: Dairygold, Glanbia and Kerry. The LTO gathers milk statements from a small number of suppliers to each of the main milk purchasers in the main EU dairy countries. Prices are measured in €/100kgs, and standardised at 3.4% protein and 4.2% butterfat.
The graph to the right shows how the three Irish co-ops have fallen away and behind the LTO trend from May 18, and the gap between the Irish milk price and the LTO average has widened considerably in the last 18 months.
In effect, Irish co-ops have not followed the European milk price trend for at least 6 months, which is to stable or even firmer milk prices. Instead, Irish co-ops have continued cutting milk prices dramatically when European milk purchasers were holding, or even in some cases increasing, theirs.
(Source of data in graph above right: LTO Netherlands)
- Most co-ops have also fallen behind the Ornua PPI for most of the last 12 months
The Ornua PPI is probably the most directly relevant of all the dairy market indices IFA monitors, in that it reflects the exact product, market and price mixes traded on behalf of co-ops by Ornua for the month concerned.
Yet, from December 2018, all co-ops bar the four West Cork co-ops have fallen well behind for almost every single month.
The gap has widened to an October level of up to 2.5c/l – worth €1050 on the October supplies of a 500,000-litre supplier.
(Sources of data in graph right: Farmers’ Journal Milk Price League, Ornua)
WE NEED OUR CO-OPS TO DO BETTER ON MILK PRICES, AND THEY CAN!
Subdued global dairy growth has been a feature for months.
It has led first to the rapid elimination of the intervention SMP stocks, and now to a real shortfall for 2019 and 2020 in privately held international stocks of powder.
SMP prices have risen by a whopping €340/t since early August!
While butter prices have come back, they had reached double their normal levels in 2017, and are now back to… their historically normal level! Also, they have firmed in recent weeks as the graph right shows.
Cheddar prices have lifted by €90/t since early August, WMP by €100/t and even whey powder prices (not featured in the graph right) have increased by €80/t over the period – an 11% lift.
(Source of data in graph right: EU Milk Market Observatory)
- Global markets have also improved
The last four GDT auctions have seen positive outcomes. We have seen a major increase in powders and protein prices: SMP is up 28% since June, and WMP up 12% over the same period.Since August, casein prices have increased 21%.Meanwhile, Cheddar and butter prices have been pretty stable, barely changing over the period.
- Returns from the main indicators have firmed, and all are well above Irish milk prices
Over recent months, commodity prices have either improved significantly (powders) or remained stable to firmer (cheese, and now, butter). European market indicators monitored by IFA have lifted throughout the period, and, futures excluded, return 1.4c/l to 5c/l more than Irish milk prices.
The Irish product mix, based on the EU MMO returns since early August, has increased just over 2.5c/l (after deduction of a notional 5c/l processing cost).
The Ornua PPI, which had been falling since May, has increased by 0.7c/l in the last 3 months.Spots and futures also suggest that those trends are set to last for the medium term at least.
(Source of data in table right: EU MMO)
- Farmers cannot afford poor prices next spring!
Merchant credit and other bills must get paid, and early heavy rain suggests a long costly winter and possibly spring ahead.Volumes are now stagnating versus last year, and constituents will dip at year end.Assuming no price changes from October, the March constituent levels will cost farmers around 3.8 cents per litre – that would be a cash-flow crippling €1600 shortfall on the March milk cheque for a 500,000-litre supplier.
Our co-ops can, and must do better on milk prices this year end and next spring!
Dairy markets: stable or stagnant?
At the 19th September meeting of the EU Milk Market Observatory Economic Board, where I was representing COPA, this question was asked. With supply and demand in reasonable balance, why are farmer milk prices stagnant (in fact, falling in Ireland!)?
We have been repeating it for months: milk output growth among the most important dairy regions has been very modest. Low private powder stocks and empty intervention, though butter stocks have been higher, have only contributed in a limited way to available supplies.
Combined with reasonably solid demand from the likes of China and other Asian countries as well as within the US and the EU, we definitely have a balanced dairy market.
Low milk supply growth – except for New Zealand’s very early season
January to July output for the main 4 milk production region remains in negative territory, at just under 0%. January to June production fell 0.5%, with particularly negative trends in Oceania and South America. Expectations from the EU Commission’s analysis suggests that production will grow very moderately for the second half of 2019.
For the two trough months of June and July, New Zealand production has increased substantially, by 14% in June (absolute trough) and just under 5% for July, while August output went up by 2.22% (milk solids – actual volume was only up 0.8%). Rabobank predicts a full 2019/20 season output for New Zealand between -1% and +1%, depending on spring weather patterns over the next number of weeks coming to the October peak.
US milk supplies were flat for the first half of 2019. For July and August, output was up only 0.2% compared to the same months in 2018.
Things don’t look good for the future either: cow numbers are down, and there are dire reports of farmers going out of business – with predictions that 10% of the state’s dairy farmers may go bankrupt in 2019 (40% shut down in the last decade).
Farm Aid concerts involving the likes of Willie Nelson and Neil Young have sought to highlight the plight of US dairy farmers.
The causes: low milk prices, and the US administration’s trade and tariff policy which have hampered the US’s ability to export, and resulted in a glut of milk at home. Exports of cheese and other dairy products to China and Mexico have been hampered by countervailing tariffs. Also, soy beans which used to be imported relatively cheaply from China are no longer available as cheaply, so costs have also increased and margins on farms have been squeezed.
Federal aid packages do not appear to have sufficed to compensate farmers for the disastrous impact.
EU milk production has also been relatively flat this year so far, with soil moisture deficits in the late spring and summer the main factors. January to July milk supplies grew only 0.2% (+0.3% for July alone), with Rabobank predicting continued moderate if any growth at all to spring 2020, largely because of tight forage and feed availability and quality expected to continue impacting into winter.
The EU Commission predicts a full-year 2019 milk production increase of only 0.5% compared to the prior year, with strong positive outcomes in Ireland, the UK, Poland and Belgium, and reduced output in France, the Netherlands and Italy, and stable production trends in Germany.
Stocks of powder low in EU, butter stocks less so
SMP stocks – which are now entirely private, as intervention is long empty – are calculated by adding up production + imports and subtracting consumption + export. Both EDA and the EU Commission expect SMP stocks to tighten even further into 2020, as a result of lower production and very strong exports throughout 2019 todate.
This is expected to have a positive impact on SMP prices, and this is also showing in current average prices, spot and futures quotes (see below).
Privately held butter stocks, calculated on the same basis, are estimated by the EU Commission to be between 20,000t and 70,000t above last year. EDA (graphs below) reflect this. This is high-ish, or more accurately either within normal variations or high, and undoubtedly contributes to keeping a bit of a lid on butter prices. The two graphs below outline EDA’s low and high estimates of butter stock.
Demand – EU exports, Chinese imports and global trade all continue strong
The EU Commission’s latest EU MMO report confirms that global demand has been solid, with the exception of whey products. Expectations are for a quieter second half on global trade, partly due to the strong buying in the first half.
EU exports of butter and skimmed milk powder have increased massively in 2019 thus far.
Within a global SMP exports increase of over 6%, EU SMP exports show record growth figures, up a huge 30.6% for the first half of 2019, but the EU Commission warns that trade could slow down as prices increase.
EU butter is competitive in world markets, resulting in 7.4% export growth in H1 2019, and a massive 90% increase in July alone.
EU Cheese exports grew more modestly in H1 2019, by 0.9%, but in the context of global cheese exports rising by 3.7% for the same period.
Where the EU lost ground is in WMP exports, which fell by nearly 22% compared to the first half of 2018, in the context of global export increases of 7.1%, mostly benefiting New Zealand.
Demand in China remains strong, with imports continuing for the Jan-Jul 2019 period on the strong growth trend of the last three years. This is especially true for milk powders (both SMP and WMP) and infant formula. For cheese, China is now the 6thworld importer, coming close to South Korea. Chinese butter imports have dropped, to the detriment of New Zealand.
US imports have surged this year, notably for butter (+46%). What will happen to these in the tariff war between the US and China in the coming months remains to be seen.
The whey powder market is highly influenced by the effects of African Swine Fever in China, as this has reduced the national pig herd, consumer of whey based feed, by a third todate – with predictions that culling due to the disease could halve the herd by year end. With China accounting for 50% of world pig production, this is an event of true global scale.
Combined whey exports from global traders have contracted by 13% (-4% for the EU). Yet, EU exports of whey powder to China have increased this year.
In the butter market, high stock levels keep prices relatively low and therefore encourage trade flows. Global butter exports grew 6.6% in the Jan-Jun period, and within that, EU butter exports performed even better, with an increase of 7.4%.
Top destination of EU butter exports was the US, with over 17,000t exported in the first half, This year. In the Airbus v Boeing EU v US WTO dispute, WTO gave the US the right to impose countervailing import tariffs on dairy products (butter and cheese in particular) which we understand could come into play from October, and upset an otherwise growing trade (including hugely successful and high value Kerrygold butter exports!). Watch this space.
Another interesting element in the examination of global butter exports is India, the single largest milk producing country in the world, which emerges as a major butter exporter, with sizeable volumes shipped to Turkey.
Despite market balance looking set to last medium term at least, sentiment affected by global trade and economic uncertainty
With market in balance, what is worrying operators? According to the EU MMO report from last week:
“Market fundamentals for dairy remain positive and global markets are in relatively good balance due to reduced milk output and strong demand. Sentiment is weakened by Brexit, other geo-political uncertainty factors and worsening trade conflict”
And yet… dairy prices are firming
EU butter prices have fallen by a massive 30% in the last 12 months, but have stabilised somewhat since mid-August, even with some firming.
SMP prices have increased by a whopping 37% since this time last year, and the trend continues gently upwards. While WMP prices are a more mixed story, they too are up, but about 3%, since 12 months ago.
Cheddar cheese, peaked last April for 2019, and have since stabilised above €3050/t.
Whey powder prices have been weak, reflecting global poor trade (see above) linked to lower demand from China.
Spot quotes and futures quotes do suggest some more positivity ahead, though, reflecting a well-balanced supply-demand situation likely to last into next spring, according to the Rabobank Q3 2019 Dairy Quarterly report published last week.
Even overall returns for current average dairy market prices have improved, especially SMP and WMP, but also cheese. While butter had firmed a little in recent week, it has eased a little in the most recent week.
For all that, the Irish product mix return, at EU average price levels, would yield a gross 35.07c/l before processing costs, slightly above what it has been in recent weeks, and equivalent to a milk price of 30.07c/l + VAT after deduction of a nominal 5c/l for processing costs. This would be equivalent to a VAT inclusive 31.7c/l – that’s around 1.6c/l more than the simple average of the August milk prices paid by Irish co-ops, as recorded in the Farmers’ Journal milk league.
Considering all the main indicators we monitor on an ongoing basis (EU MMO averages, spots, futures, GDT, Ornua PPI), we have to note that, apart from the Ornua PPI, which would return, for August milk, the equivalent of 29.22c/l + VAT (30.8c/l incl VAT), all other indicators would return an Irish milk price equivalent net of VAT in excess of 30c/l – a not insignificant improvement in recent weeks.
European milk prices are stable… yet Irish milk prices have been falling
EU MMO reports and LTO reports agree: EU average milk prices have stabilised in recent months, and look set to at worst stay firm for the medium term at least, in light of the fact that markets are well balanced.
The EU MMO reported average EU milk producer price as in the graph below shows stability for the last three months at around €33.5/100 kgs.
Irish milk prices, on the other hand, have been falling in recent months, with most co-ops applying cuts of between 2c/l and 3.3c/l since January (there was also some small cuts by some co-ops last November), so that we estimate the current(August) 3.3% protein, 3.6% fat Farmers Journal league simple average would work out at around 28.5c/l + VAT (30.04c/l incl VAT). This average is however heavily influenced by the West Cork Co-ops, and some of the main milk purchasers are paying just over 27c/l + VAT (28.5c/l incl VAT).
For the last EU MMO Economic Board meeting, our LTO colleagues have released their July milk price review ranked by price, and it clearly shows the three Irish co-ops included in the review, Glanbia, Dairygold and Kerry, firmly at the bottom.
It is worth noting that most milk purchasers are holding their milk prices for August and September, and that the gap between the LTO average and the price paid by two out of three Irish co-ops included has widened further as both Glanbia and Dairygold have cut their August milk price.
This brings the gap between Irish milk purchasers and the average LTO price to €2.93/100 kgs, leaving Irish dairy farmers at a unique disadvantage relative to their European counterparts.
Conclusion: Rabobank predicts supply/demand balance could even past spring 2020
The Dairy Quarterly Q3 2019 report, published last week by Rabobank, concludes that, despite slowing global economic activity and uncertainty, “the outlook for demand growth is more than enough to absorb the modest volumes of increasing milk flows, and the current general firmness in global markets is expected to remain through mid-2020”.
This should help make Irish co-ops rethink their pricing policy over the coming months!
The following is the Rabobank summary view on the factors which will be relevant to dairy markets in each of the main regions: