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]Largescale SMP stock disposal may presage stronger powder markets in 2019
Just over 203,000t of SMP were sold out of intervention stock this year, with minimum sales prices edging up slightly from July. Latest minimum sale price, at €1251/t, are €100/t or less below the quoted price for fresh feed grade SMP.
Source: IEG Vu based on EU MMO
Feed SMP spot quotes from France Agrimer for 24th October was €1248/t; PZ quotes for the Netherlands were €1390/t on 14th November, while Kempten (German) quotes for the same day were €1330/t.
We estimate that around 170,000t of SMP are left in intervention store, which is still a significant amount of stock. Also, some analysts report that at least some of the tonnage sold out of intervention could still be in (private) stock as opposed to utilised in the market place.
Even allowing for this, there will be at least 2 more sales of SMP out of intervention by year-end, and real scope for further sales next year as demand from calf milk replacer manufacturers rises in spring.
Current fresh food-grade SMP prices, based on latest EU Milk Market Observatory reports dated 4th November, have edged slightly up at €1580/t. Futures markets for the last few months have consistently suggested SMP prices into 2019 trending towards €1700-1800 in 12 months’ time. Not a very exciting price, and in fact just over intervention buying-in prices, but well up on current levels.
While the price trend for butter and butterfat has been down, while remaining at historically strong levels, we would be hopeful of a rebalancing of the SMP/butter price relativity sustaining reasonable returns into next spring. Of course, this depends strongly on global output trends (see below).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk supplies picking up in NZ, US but easier in EU
September production in the EU is estimated by USDEC (graph below) to have eased slightly. There are no official figures available yet, but this is credible in the context of the impact of the summer drought on fodder and feed availability and costs.
German supplies for September are estimated by INTL FCStone to be 0.5% up, and French supplies 4.4% down on last year. Dutch milk output for the Jan-Sept period was down by 1.9% according to ZuivelNL.
Global supply balance however is very modestly up, as can be seen in the USDEC graph, and this in conjunction with still high intervention stock is creating its own expectations.
Latest estimates of current demand growth are at 1%, due to a slowdown in the economy of China, and slower imports from SE Asia in general after a very strong 1st half, while output growth is outpacing demand slightly at 1.5%.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Returns easing at home, in the EU and internationally – though powder prices firming
The impact of the recovery in supplies coinciding with strong stocks and slightly easier demand is, predictably, that returns have been easing.
EU MMO figures (see below) suggest gross returns, before processing costs are deducted, of between 34.87c/l (allowing for Irish butter and SMP price) and 35.74c/l (allowing for EU average prices for all products) – so after a notional processing cost of 5c/l, a milk price equivalent of between 29.87 and 30.74c/l + VAT (31.5c/l – 32.4c/l incl VAT).
Based on EU MMO data[/vc_column_text][vc_column_text]Closer to home still, the Ornua PPI for October has dropped a little further, from 110.4 points to 106.5 points – the latter equivalent, according to Ornua’s own calculations, to a milk price of 30.26c/l (31.9c/l incl VAT).
IFA’s recent research has shown, as per our November Dairy and Liquid Milk newsletter here that co-ops have undershot the PPI from May to September, costing a 350,000l milk producer up to €1900 over that period.
Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The future looks somewhat more encouraging for powder, however, with spot quotes rising for the last 3 weeks, and having again broken through the €1600/t mark in Germany, France and the Netherlands.
Interestingly, too, bearing in mind the importance of whey in most of our milk processors’ product mixes, average whey prices and spot quotes have also been rising over recent weeks.
Finally, European futures for SMP published today (15/11/18) suggest an expectation of SMP price recovery in 2019 to levels between €1700-1800/t. Fast reducing SMP intervention stocks may influence this even more positively over the coming weeks and months, however.
On the same date, SMP trading on the NZX futures for the period January to April 2019 has sold for prices between US$2080-2175 (€1840 to €1924 at today’s exchange rates).
GDT – a bit of context
Much has been made of the fact that we’ve had 6 consecutive negative GDT auctions in the last 3 months. However, since last August, the SMP prices has actually improved by US$50/t, to nearly US$2000 (€1770).
Also, the quantities on offer in any one auction tend to be a very small fraction of international trade. The table below outlines the quantities which are expected to be made available for sale at the next auction on Tuesday 20th November. While WMP is as usual the product of which the largest quantities are traded, most other products are traded in much smaller volumes.
For context, GDT traded 654,000t of all products combined in 2017. For the same year, total dairy exports (all products) out of New Zealand amounted to 3.26m tonnes; exports of cheese, SMP, WMP and butter from the EU to 2.14m tonnes and 1.94m tonnes from the US.[/vc_column_text][vc_column_text]
Source: INTL FCStone based on Fonterra
[vc_row][vc_column][vc_column_text]Output growth expected to be relatively modest
The most recent EU short term outlook report published by the EU Commission shows EU milk supplies have grown more modestly, rather than fallen due to the drought. However, it is expected that fodder supplies for the winter will be particularly affected in Germany, Northern France and the Benelux. Ireland will most probably has similar problems, as will the UK. Milk supplies for August were estimated at +0.5%.
Consequently, the EU Commission has revised its projected production increase for 2018 from 1.4% to almost half, at 0.8%. For 2019, the continued impact of fodder shortages leads the Commission to estimate production growth at no more than 0.9%. For both years, the EU Commission expects to a very small downward adjustment in cow numbers.
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Global supplies for the year to August were reported 1.5% up. The graph right shows that somewhat slower EU growth for the month of August is being compensated for by rising US and NZ production.
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Demand good in US, SE Asia and China, but growing less fast than output
Global dairy demand forged ahead in the first half of 2018, but is now reckoned to be rising by only 1% – with global output rising 1.5%.
Demand remains good in China, though import growth has slowed for the Jan-Jul 18 period compared to the same period in the previous year.
Source: CLAL[/vc_column_text][vc_column_text]In the rest of SE Asia, demand for powders and casein has improved after a poor start to the year, while demand for cheese and butter is strong, albeit from low levels.
In the US demand is very strong for cheese and butter (after a poor 2nd quarter), while powder demand is slow.
Mexico, Algeria, Egypt and Singapore have seen strong increases in SMP imports, with strong increases in imports of butter in China, the US and Australia. Cheese imports to Japan and Russia have also increased strongly – Russian imports came from outside of EU, which remains embargoed.
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Commodity prices easing, but September returns still stronger than current (Irish) milk prices
Commodity prices in September evolved positively generally in Europe – though butter did weaken – but significantly worse in Oceania. Commodity prices between the two regions continued to diverge, with higher SMP prices in Oceania, and lower prices for most other commodities – especially significant difference on butter.
Based on data from: EU MMO
More recent trends in Europe – late September/October – suggest continued easing. However, returns from the main commodities for 30th September remained above 37c/l before processing costs – so a milk price equivalent of 32.21c/l + VAT (33.95c/l incl VAT) after a notional 5c/l processing cost has been deducted.
Based on data from: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Outlook a mixed picture
Global output growth shows diverging trends in different regions: strong increases in NZ (and South America), relative stability in the US, and expectations of lower output at year end and new year from EU due to the impact of drought on fodders stocks.
While EU overall supplies have risen 1.7% for the January to July period, they have slowed in August, and statistics for the most recent period suggest that Germany, France and the Netherlands have seen negative growth.
While rising oil prices and a strong US$ are major positives, traders are concerned about what is going on in New Zealand: the NZ$ is very weak against the Euro, further lowering the price of NZ products on exports, volumes of milk are rising fast (+4.6% in August) and the GDT prices have been at odds with trends in Europe for some time, and are now dragging EU prices down.
Trade/tariff wars, the prospect of a potential hard Brexit and slowing global economic growth are also feeding into a somewhat less positive sentiment – all the more so when traded volumes were stronger in the first half of the year than they are now.
The normal bounce from the “holidays” demand (Thanksgiving, Christmas…) has been limited. Stocks of butter have been rebuilt, and so prices have eased – though the expectation is that lower milk output over the winter and early part of 2019 will likely help prices recover.
Meanwhile, from an Irish milk price perspective, stability should be the worst case scenario between now and year-end.
[vc_row][vc_column][vc_column_text]A mixed outlook – modest output growth, but moderating prices
Global milk output growth has continued to moderate into July, indicative most of all of the impact of drought and heatwaves in Europe. More modest US growth (+0.4%) also played a part, and a drop in Australian production for July (down 4.2%). Fodder is short and feed expensive in Australia due to unfavourable weather factors.
Meanwhile, July New Zealand output was well up (+4.5%). July is the first month of the new season, and the outlook is expected to be for strong continued output over the coming months, with a strong pasture growth index at a 5-year high. NZ production is due to peak in October, which is only next month.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]An Oceanian/European-US split on dairy prices
While we continue to see firmer dairy prices being held in Europe, and to some extent the US, Oceanian prices, especially as measured through the GDT auctions, have eased considerably in recent months: the last strongly positive GDT auction was on 15th May last, and the latest today fell by an average of 1.3%.
Meanwhile, EU dairy prices had picked up, but there is now a little bit of weakness creeping in, as is evident most of all from spot quotes.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: FCStone International
In addition to the EU dairy spot quotes from Germany, the Netherlands and France, the EU Milk Market Observatory reports weekly on the spot price for raw milk in Italy and the Netherlands.
This had increased significantly since February with a few dips in the curve, but both indicators have eased in recent weeks, to €40.3/100 kgs for Italian raw milk, and €36.5/100 kgs for Dutch raw milk.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Average dairy prices reported by EU Member States through the EU Milk Market Observatory, on the other hand, in the main continue firm up to 9th September, the most recent date for which data is available.
Butter has lifted above €5600/t, while SMP continues over €1600 for the second week in a row.
Cheddar cheese is steady, while whey powder also holds its own after a good €50/t improvement since early August.
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Irish/Euro returns above Irish milk prices
The Ornua PPI for August has increased by a significant 3.8 points to 111.1 points as Irish SMP prices in particular catch up with rising EU average levels. The Ornua-calculated milk price equivalent is 33.5c/l including VAT – this is 1.5c/l more than what the three main milk purchasers are currently paying.
Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]So, combining those various indicators to calculate a milk price equivalent, net of VAT, is summed up in the table right, with our more usual analysis of EU average market prices, both using Irish SMP and butter prices as reported by EU MMO and using the EU averages, outlined below.
Sources: EU MMO; FCStone International, Ornua, EEX, GDT
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In summary, the main European indicators, including the Ornua PPI, would suggest the scope for milk price increase. It makes the Irish co-ops’ cautious August decisions all the more disappointing, as apart from Aurivo who increased milk prices by a modest 0.5c/l, all those that have announced their August price as we write have opted to hold at July levels.
As farmers’ cash flow are stressed by massively increased by feed and fodder expenditure, it will be important for co-ops to pass back the maximum possible for milk to encourage farmers to keep cows fed and the milk flowing!