Latest Dairy Market Blog
IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.
Coronavirus affects markets in positive or negative ways – depending on whether you sell retail consumer product or not
Before the COVID-19 pandemic, dairy markets were headed for a positive 2020: modest milk supply growth, solid demand.
Things have changed, but not all for the bad. We have seen a dual market impact to the outbreak of COVID-19: on the one hand, panic buying and a return to cooking at home have boosted retail sales in a significant way. Though it must be said that even the initial stock piling has eased, and may militate against further purchases as the home stocks are consumed first.
On the other hand, the closure of restaurants and cafes has meant food service sales have crashed. I remember a statement by Starbucks some years ago that they had just reached the point where they sold more milk than coffee, globally. Losing the coffee shop sector alone is a major blow to the sector.
[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The graphic below illustrates well the importance of the food services market to the dairy sector.
A study by AHDB Dairy UK in 2018, came to the conclusion that 51% of all meals eaten out in the UK included dairy, in either of the formats below, from dairy host meals (e.g. pizza or other take away), dairy as a (hidden) ingredients, hot beverages with milk, pure dairy as in ice cream or cold dairy drinks.
Source: AHDB Dairy UK
For dairy sectors which are mostly engaged on the domestic market, extra retail sales as people now eat and cook at home may have partly offset the food services downturn – indeed, there is some evidence that Irish milk processors involved in liquid milk are coming under pressure to ramp up volumes for retailers, which is a positive.
However, for most of the Irish dairy sector, which is export and business-to-business oriented, retail sales are not saving the day.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]For exporters, there was also a significant physical disruption in trade caused by containers becoming stuck at ports, in China especially, either full or empty, but blocked in situ when lockdowns were preventing any work being carried out. This has shown on Chinese powder imports especially (see below). The situation was such that containers for global trade of ANY product were impossible to secure, with up to 6 weeks waiting times, and at significantly higher freight costs.
There are now signs that containers are moving again, but there are also concerns over product still in transit or storage having to be dealt with (consumed, or disposed of where the shelf life has to little to go) before any trade in fresh product can resume.
In addition, we have seen a lot of disruption even closer to home with border closures in Europe, though this has been somewhat mitigated by all European government and the EU instances agreeing to treat the food chain from farm to fork as an essential sector.
Stock have been building up, and food wastage has increased with a very sudden closure of the food services market either as a result of social distancing, or simply by mandated decision.
One other element to the disruption are shortages of inputs of which China would have been the source: certain food or feed ingredients, crop protection products, etc. This has lifted the cost and reduced the availability of some of those products, to the detriment of the farming/food producing community globally, including in Europe.
The upshot of these major disruptions and the uncertainty created by the sheer overwhelming nature of the pandemic have led to dramatic falls in the world’s stock markets, in economic growth forecasts – some frankly catastrophic, possibly too much so! – and to negative price trends for the majority of commodities, from oil to food.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]What’s happening to milk output?
Meanwhile, milk production globally is not expected to grow by much more than 1% against the 5-year average, according to Bord Bia.
2019 deliveries globally were only about 0.1% on 2018.
While there is some greater dynamism in the early months of 2020 in Europe and the US as the spring peak approaches – and how the spring output turns out in those two regions, with lower feed costs reported, will be crucial to global markets – it is somewhat offset by the impact of drought in the NI of New Zealand.
The EU lifted output by 1.7% in January, while the US February supplies are up a whopping 5.6% for February.
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy imports into China
In its latest report, CLAL shows better than expected results for dairy imports into China, especially from the EU. Overall while total volume was down by 1.9% for the first two months of 2020 (slap bang in the middle of the COVID19 pandemic in China), value is up 3.8%. However, as the table shows, this is a mixed picture. Milk, cream, butter, cheese and whey powder have seen continued significant increases, albeit mostly from relatively low volumes.
Powders, on the other hand, are well back: WMP down nearly 5%, SMP nearly 25% back, and fat filled powder down 34% – though the latter also from low volumes.
Source: CLAL.it[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Green shoots in Asia?
The COVID-19 pandemic has been such a catastrophic and global event, it is very difficult to predict anything. However, there are interesting signs coming from China. As it seems the country is slowly starting to come out from under the pandemic, towns which had been mandatorily locked down like Wuhan are being re-opened to quasi normal life. Food imports have been prioritised by government. Many operators report containers moving again, and therefore becoming available for trade.
Restaurants in Japan and Korea are reported to have reopened, which is a good sign, but business is most definitely not back to normal.
Chinese consumers are also starting to run out of imported infant formula. There was a lot of stockpiling in the early days of the outbreak, and stores are now out of stock, while consumers are back demanding product. EU suppliers supply 71% of all China’s IMF imports, with France and the Netherlands supplying the largest volumes, but Ireland not too far behind.
As food imports are been green-lighted by government as Chinese trade and business progressively returns to something approaching normal, this should in time benefit milk powder trade, and Irish infant formula manufacturers, with positive impacts for the Irish dairy sector.
Lower commodity prices and weaker market returns
We have documented in recent months just how global milk supplies had grown only modestly and stayed very much in tune with reasonably good demand. The COVID19 crisis is causing a demand shock, but at a time when supply is moderate – which would not have been the case, say, when the Russian ban hit back in late 2014. This will hopefully allow for a quicker market recovery when the pandemic ebbs and trade returns towards normality in coming months.
Meanwhile, commodity prices have been affected by the trade disruption and demand shock caused by the collapse of food services.
The table below shows that average EU average returns from product combinations relevant to the Irish product mix have come back by between 2.5 and 3.6c/l equivalent since early January (at which point they were on an upward trend). Spots for SMP and butter have come back further (4.6c/l), and this week’s trend for the Dutch products suggest further price decreases. It is worth noting that an index such as the Ornua PPI, which reflects a combination of forward contracts, branded consumer products and other elements, has offered a good buffer against the short term trends – in fact, the Ornua PPI had been firming to February. It is also worth reminding ourselves that the majority of co-ops have undershot the PPI for 18 months or more in the milk prices they have paid farmers.
However, as we write, the Ornua PPI for March is not yet available, and chances are that it will start to reflect a more difficult price situation, while still providing a buffer relative to the other indicators.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
[vc_row][vc_column][vc_column_text]Dairy market blog – 3rd February 2020
Global milk supplies have been growing by less than 0.5% for most of 2019, and according to Rabobank’s Q4 Dairy Report, this trend will likely continue with growth of less than 1% through 2020 and possibly into 2021.
Ornua concludes that 2019 global milk supplies will likely be about on par with 2018.
Latest output trends in the EU have seen a fall off in Irish deliveries by 5.7% for December – though it should be remembered that the December 2018 figure was a massive increase on the previous December. Output for Jan/Dec 2019 is up 5.2%, reaching (some expect exceeding) 8 bn litre.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Rabobank Q4 2019 Dairy Report[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In Germany, milk collections are estimated down by 0.2% at this point of the season compared to the same period last year.
Early January collections in France were up modestly at around 0.6% with the season todate up around 0.4% compared to the same period.
UK supplies for the 2019/2020 season todate are 0.8% up on the previous period, with late January supplies down 1.4%. INTL FCStone estimate that the December supplies were down 1.1% and January 1.3%.
In all three cases, while the supplies are only modestly up, or even down, on the reference period, they tend to be higher than the 3 or 5 year average, so the underlying trend of growth remains, but it is very subdued.
New Zealand supplies for the calendar year 2019 were down 0.32% (milk solids), though up 0.2% in December and something similar in November.
US output was 0.9% up in December, but up only 0.3% for the calendar year 2019.
Subdued international milk output, coupled with somewhat better international demand, boosted by cheaper dairy products, is the main reason why, despite concerns over Brexit, and other international trade difficulties, dairy prices have not fallen as much as expected during 2019, and have even started to improve, especially for SMP, since August or so.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Demand – impact of coronavirus and Brexit?
China has played a huge part in recent years in maintaining strong global dairy demand, as the comprehensive table below shows. Since 2015, imports of bulk and packed milk has increased 81%, infant milk formula imports practically doubled, as did WMP. SMP imports grew 72%. Cheese, from low levels, rose 51% and butter rose by 60% by 2018, but has come back somewhat since.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: CLAL.it[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The recent outbreak of the coronavirus, and the reaction to it, have seen entire regions closed down in an attempt to contain contagion. As we write it is not clear how long it will take to first contain then fully treat/vaccinate the populations so that normal movement of people can resume.
Meanwhile, however, it is only to be expected that the movement of goods, indeed demand for goods, will be affected by the lock down. What impact this might have on the global market for dairy will obviously depend on how soon the situation can be brought under control, then resolved.
Regarding Brexit, after approval by the UK and EU Parliaments of the Withdrawal Agreement, we have entered an 11-month transition period during which trading conditions will remain unaltered – so after a very uncertain 12 months, at least some short to medium term certainty.
That is not to say that there will not be plenty drama and political statements, as we already hear Boris Johnson say he will seek to diverge on a number of standards including labour, environmental and others, and Michel Barnier warn him that such statements will make trade negotiations difficult if not impossible. Do expect possible fluctuations in the value of Sterling as markets take various views of the latest goings on, but no custom delays or tariffs until 31st December 2020, and after that only if we have a no-deal Brexit, or if we have a deal with includes some level of tariffs and requires some checks – and this is very likely.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]And yet, prices continue to firm
Concerns over the Chinese situation and Brexit aside, it looks like, after the quiet period which always follows Christmas, most dairy commodity indicators have resumed their firming trend.
EU spots have seen butter prices stabilise for some weeks at around €3600, while SMP has been inching its way first above €2500/t and now above €2600. Whey is the biggest gainer, however, now breaching the €800/t.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: INTL FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU average dairy prices show the same trend, with stable butter prices, rising SMP and whey powder prices.
Based on the prices reported for the EU average of the product mix most relevant for Ireland, gross returns for late January rose to nearly 38c/l, which is equivalent, after a 5c/l processing cost is deducted, to a milk price of 32.97c/l + VAT (34.75c/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]The trend towards firmer commodity prices has also shown through the first 2 GDT auctions of 2020, which saw an uplift in the price index by 2.4% (7th Jan) and 1.7% (21st Jan) respectively. At US$4250/t, the butter price is comfortably above the middle of the price range for the last 5 years. SMP, at just over US$3000/t is at its highest for the same period.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text][/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Taking stock of all the relevant indicators since mid-August, we see a significant increase in the milk price equivalent they represent, with the EU MMO and EU spot SMP/butter combo returning over 5.4c/l more, the EU MMO full mix 3.32c/l and the Ornua PPI (to December 2019) a more modest 1.33c/l. Meanwhile, a comparison of the average Farmers’ Journal Milk Price League for August 2019 with an estimate of December 2019 suggests an increase of only 0.33c/l – this is because many co-ops cut their milk price in August 2019, at a time when commodity returns had just bottomed out.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on sources as above, and Farmers’ Journal Milk League[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]It is clear that there is scope for further milk price increases by Irish co-ops, after the modest price lifts (around 2c/l) applied in different ways for the October to December period.
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.