Latest Dairy Market Blog
IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.
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:
[vc_row][vc_column][vc_column_text]Supply growth remains subdued, but nervous sentiments impacts prices
It’s a bit of a broken record among dairy market analysts: milk output growth globally has remained very subdued – which should underpin better dairy prices – yet markets are sluggish with easier butter prices the main characteristic.
Global milk production is actually down, estimated at -0.4% for Jan to June, with weak supplies in the US, Australia and South America. The new 2019/2020 NZ season looks set for a strong start, with June supplies up around 13% in milk solids terms. However, June is the trough month, and in 2018 accounted for less than 1% of milk solids production for the full year.
EU production is only very modestly up (only +0.4% for Jan-June), but hides differing trends. Hence, France’s negative production trend remains negative, but less so, while German production, rising in the first quarter, has been falling every month since. Dutch milk output continues down (-2.7%) as last year’s herd reduction scheme continues to impact. Between them, these 3 countries account for around 45% of all EU milk production.
Other countries expanded production, not least Ireland, +10% for the Jan to June period, the UK (+3%) and while Poland had been growing its production fast up till now, it has just registered it first negative since late 2016 in June, down 0.5% compared to the same month last year.
The main problem comes from demand-side factors.
Weaker economic growth
Global economic growth has been easing for some months now, with particular reports from the Eurozone, the US and China. The IMF has for some time been flagging its concerns about a possible global recession, urging the US and China to resolve their trade skirmishes, and have now reduced their growth forecasts for 2019 and 2020.[/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]Global dairy demand is a mixed bag
In simple terms, demand is more buoyant in (some) developing countries than in the developed world. Hence, demand is relatively sluggish in the EU, while it is reported strong to very strong in Asia (including China).
Chinese imports, which had been growing in volume since last October, marked a beat in May, to recover slightly in June.
Year to date (June) volumes have increased very significantly, especially for certain products. WMP imports have risen 29%, while SMP went up 28.4%. Infant formulae imports were also well up, at 14.6%. Bulk and packed milk was up a whopping 32%, while cream rose 53% and condensed milk 39%, albeit the last two from much smaller volumes.[/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]On the other hand, demand in Africa and the Middle East continues to struggle. African demand for Jan-June is reported down 10%, although this does not include FFMP (fat filled milk powder or enriched milk powder) which is comfortably offsetting the fall.
Middle eastern demand, after a negative period, is believed to be on the way back up.
Oil price revenues, despite OPEC’s best efforts, have been hampered by crude oil prices remaining around $60/barrell. For many Middle Eastern and some African countries, these are crucial revenues to finance food, including dairy, imports.
More positively, lower priced butter is now more affordable, and there are reports that this is starting to impact positively on some markets.
These are probably the main factors affecting both the global economic expectations and the market sentiments.
Brexit is the obvious and most immediate one. Much has been said about the (already being felt) impact of Brexit on beef markets and prices. But dairy markets, especially Irish dairy exports, are also very dependent on the UK – we have documented this in the initial IFA Brexit document back in March 2017, and you can check the facts and figures here: https://www.ifa.ie/wp-content/uploads/2017/03/763773Brexit-imperatives-policy-paper55629.pdf
Trade disputes between the US and the EU (Airbus v Boeing, and the imposition of import tariffs by the US including on EU dairy products), between the US and China (again, mutual imposition of import tariffs, which have led to serious implications for US farmers, and have given rise to the need for the US to spend a reported $16bn in farmer trade aids) are also causing major disruption in world trade. The uncertainty this creates for the ability to trade any commodity is damaging all markets, including dairy markets.
Finally, a number of countries with sizeable populations and potential large markets for dairy imports are affected by wars and conflicts – e.g. Iran and much of the rest of the Middle East.
[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]So, what impact on dairy prices?
EU dairy prices are a tale of 2 trends: improving powder prices and easing butter, cheese and whey prices.
Since January, average butter prices as reported by the EU MMO have decreased by €750/tonne, while whey powder has come down €150/t which is 17% to 18% in both cases.
Cheddar cheese prices have been relatively stable, by comparison, with a fall of only €70/t or 2.2%.
Meanwhile, WMP is now €140/t higher than it was in early January – that is 5.2% higher; and SMP prices have gone up €340/t, a spectacular increase of 19.5%.[/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]GDT trends over the same period have been similar for powders, with a steady, if greater (WMP) and lower (SMP) price improvement than EU quotes have shown. Whole milk powder (WMP) remains the product the most traded through GDT, as has been the trend from the very beginning.
Butter prices are not dramatically changed from early this year ($50 less per tonne), but this is after a major uplift from March to June.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on GDT data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Returns continue to ease – but remain above Irish milk prices!
Returns from dairy product are measured through a number of indicators.
Most directly relevant to Irish co-ops, because it reflects what they trade through Ornua, is the Ornua Product Purchasing Index (PPI).
Just like Irish milk prices, the Ornua PPI is announced in retrospect, and reflects returns for a basket of product traded the month prior to its publication.
For July trade, the Ornua PPI fell by 1.7 points to 104 points. This was calculated by Ornua to be equivalent to a milk price of 29.31c/l + VAT (30.9c/l incl. VAT). This is 1.4c/l more than Glanbia are paying for July milk, at 29.5c/l incl VAT. As we have shown in previous blogs, only the West Cork co-ops have consistently exceeded the Ornua PPI returns in their milk prices over the last 10 months. The other payers have undershot the PPI for the majority of the last 10 months, with Lakeland Dairies coming closest to it. In July, though, it appears the gap has widened further: with the exception of Lakeland, who cut by ½ a cent, all other milk purchasers have cut their price by 1c/l, when the PPI equivalent only fell by 0.67c/l.
Other indicators (see table right) have continued to ease, but remain equivalent to milk prices before VAT of between 29c/l and 31c/l (30.6 to 32.7c/l incl VAT).
It would seem most Irish co-ops who wish to sustain their suppliers precious confidence have scope to hold prices for another while![/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]CL/IFA/23rd August 2019[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column][vc_column_text]Global supplies fall further to May/June 2019
Global milk supplies to May were estimated by Ornua at -0.3%, with May output down 0.4%.
Chief influencers were weak to negative supply growth in Oceania, South America and the US, and only very modest growth in the EU (+0.6%) over the period.
Polish milk output, which has been almost as strongly dynamic as Ireland’s, was back 0.5% for June (note, this is their first year-on-year negative result since October 2016!). A heatwave in June and another in July, accompanied by low precipitations, have also affected European milk production.
Germany has seen an estimated 1.5% fall in May, and 1.4% in June. France has suffered from record temperatures in June, and milk output has fallen back 0.2% for that month, after a 1.6% reduction in May.
Dutch milk output, still moderated by herd reduction, is down 2.7% for the January to May period.
Meanwhile, UK milk production for January to June was up 2.8% (+1.3% for June, so a slowing trend), and Ireland’s up 10%.
In the US, June output was down 0.3%, continuing the subdued trend of recent months.
In New Zealand, where the new season 2019/20 has started, June milk solids output was up a whopping 13.4% following four consecutive months of reduced production.
Source: USDEC[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Demand: international uncertainty affects confidence – and yet, EU exports continue to increase
It seems that the biggest issue with demand is not about pure economics – butter prices have become quite a bit more affordable, for example – but market sentiment.
There’s a lot going on: Concerns over the increasing likelihood of a no-deal Brexit, worries over the prospect of increased US tariffs on EU dairy products (butter and cheese in particular) in the wake of the Airbus/Boeing trade dispute between the EU and the US, global economic slow-down – with the US Federal Reserve reducing its interest rates to boost the US economy, and the Chinese economy slowing down to its slowest since 1997 (+6.2 % all the same!). All of these factors are playing into a medium term caution which is keeping forward demand in relative check.[/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]For all that, EU dairy exports have continued to increase strongly for the January to May period. The following is an analysis of those exports for the period from January to May 2019, with facts and figures from CLAL.it:
EU dairy export increased both in quantity (+8.4%) and in value (+8.8%), supported by a significant increase in May (+14.5% in value).
Infant milk formula, mainly destined for China, Hong Kong and Saudi Arabia, and Cheese, which sees the United States, Japan and Switzerland as the target markets, are the first two products in value, thanks also to an increase in the unit prices of the two products (respectively of 7% and 5%).
There has been good growth for fat filled milk powder exports (FFMP), the milk powder that has a fat content similar to whole milk powder, but instead of butterfat contains vegetable fats. This is a very important product in the Irish export product mix. It is intended primarily for consumers in hot countries, with strong demand in Saudi Arabia, Nigeria, Senegal, Yemen and the United Arab Emirates.
The EU-28 exported over 480,000 tons of FFMP in January-May, for a value close to 900 million euros (+11.3% in quantity, +10.8% in value).
SMP exports reached 435,000 tons in the same period (+32.3% on a trend basis) and exceed 822 million of euros (+41.8%).
EU-28 WMP exports have fallen both in quantity (-24.1%) and in value (-16.9%), in the first 5 months of 2019.
Milk and cream export increased +19.1% in quantity and +13.5% in value. The main destination country is China, accounting for 42% of total export, followed by Libya, South Korea and Mauritania.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy market prices – GDT prices pick up, weaker butter in EU
The 16th July GDT auction saw a strong recovery of most product prices, but especially the strongest trading ones, namely WMP and SMP.
Source: GDT[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Meanwhile, EU prices as reported by the EU MMO present a mixed picture.
Butter is weaker, down 13% since January, but at around €3800-3900/t still remains at the higher end of the price trend in the last 20 years.
SMP prices have increased over 17% since January, but remain just about at the average historical level at around €2000/t, with likely scope to increase further, given the right supply/demand circumstances.
Whole Milk Powder prices on average in Europe have increased 7.5% since January, while Cheddar cheese prices have remained relatively stable at between €3100 and €3080/t.
Finally, whey prices, which always make an important contribution to the returns from cheese, have eased by 15% since the beginning of the year.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on: EU MMO Data
Source: INTL FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]July indicators do underpin current milk prices
We have documented in our most recent Dairy Market Blog that all co-ops except the West Cork co-ops have paid milk prices below the Ornua PPI milk price equivalent for most of the last 9 months.
Current returns, while somewhat easier, including the slightly lower June 2019 Ornua PPI, would justify July milk prices of 30 to 31c/l + VAT (31.62 to 32.67c/l incl VAT).
With current (June) milk prices averaging 29.73c/l + VAT based on the Farmers’ Journal Monthly Milk Price League, current returns should allow co-ops to hold July milk prices at the very worst.
Most of the largest milk purchasers are in fact paying nearly a ¾ of 1 c/l below that level, at just below 29c/l, and those are among the milk purchasers who undershot even the PPI milk price equivalent for most of the last 9 months – for more details on this, see our previous Dairy Market Blog of 15th July last.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]