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]Milk output in EU and US now rising in response to higher milk prices
Global milk output has been increasing in earnest, estimated to be currently up 0.7% year on year.
In Europe, where supplies had been subdued in the most influential countries, the trend is changing in recent months and August supplies for EU 28 are estimated to be up 1.8%. For that month, Ireland’s output was up 11.1%, Denmark up 8.6%, Poland up 5% and Spain up 1.6%. An FCStone estimated figure for UK September output suggests a 2.7% increase (it was +2.4% for August). Even France and Germany are now seeing a recovery after months of languishing behind last year’s levels, with +0.5% and +1.5% increases in August output respectively.
The Netherlands, on the other hand, showed the impact of the phosphates-related herd reduction scheme, with an output decrease for August of around 2%, and a 30% increase in cow culls in the first half of 2017.
US August production continued on its upward trend at + 2.1%.
In New Zealand, the early part of the season has been marred by an overly wet spring. August supplies were back 1.5%, and this is after a decrease of over 1% for the 2016/17 season.
Source: DCANZ[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Apart from the higher milk prices, stronger supplies are encouraged by lower global feed and fertiliser prices, good EU weather conditions in late summer/early autumn, and increasing per cow yields compensating for the stable global herd size.
Stocks of butter in the US are high, but falling for the last 5 months, while SMP stocks in the EU continue to overhang the market (see below).
Butter prices past peak
While butter prices remain historically high, they have undoubtedly passed peak, and look set to ease further in coming weeks as milk and butterfat supplies become more plentiful. However, in Oceania and Europe, prices remain at historical highs, and continue to underpin strong milk prices.
EU spot prices this week (11/10/17) continued at above €6,400/t though this was a drop of €275/t in the week alone.
In their Q3 Quarterly Dairy Report, Rabobank state that “more concrete signs of sustained supply growth from major exporters mean that global prices have peaked in the current cycle”.
Source: CLAL[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Concerns over SMP intervention
Intervention buying in for SMP closed at the end of September, and led to further weaknesses in the market price for SMP. Stock officially now stands at 380,000t, though adding up all SMP bought in in 2015, 16 and 17, and bearing in mind that only 140t have actually been sold out, the amount of SMP bought in is closer to 405,000t – a major overhang which has dampened SMP prices despite there being nearly 10% less of it made in the EU!
In addition, declared intent by the EU Commission to sell product, including some rumours that they may consider not applying the usual reserve to the sale tenders – thus with the prospect that product may be available at less than intervention buying in price – have sent a damaging signal to buyers, who are now holding back in expectation of lower prices.
However, the EU Commission has not formally decided to sell without reserve, and doing so would likely be politically unacceptable, as well as run foul of their stated aim to dispose of SMP without market disturbance. As we have stated many times here, rumours and perceptions feed market sentiment at least as much as fact, and can have just as dramatic an impact on prices.
Source: CLAL[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU returns continue to be buoyed by butter
The EU MMO reports an average butter price for 1st October 2017 a little easier than previous weeks at €6,340/t, but still at a historically high level.
SMP has been below intervention buying in for a number of weeks now and cheese (cheddar here) has been holding its own.
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]As a result, the combination of products which makes up the Irish portfolio would return only very slightly less than the 41c/l gross we have seen through much of September, at 40.70c/l before processing costs – a milk price equivalent after deduction of 5c/l processing costs of 35.7c/l + VAT.
Using the prices quoted for Irish SMP (slightly higher than the EU average) and butter (lower) in the same calculation shows an only very slightly lower gross return of 40.42c/l before processing costs.
Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Closer to home, the Ornua PPI has lifted a massive 3.3 points for September trade, to 114.3 points, equivalent to a milk price of 34.7c/l incl VAT. As some of the international trends apply to Irish prices with some lag, we may yet see some further slight uplifts in the Ornua PPI over the next couple of months.
Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Demand – quite a lot of positive factors, but some headwinds
There are many factors favouring demand in the global economy:
- Global economic trends are positive, with a return to growth
- The Euro is expected to weaken against the US $ (good for export competitiveness)
- It is expected (and indeed already has, somewhat) to stabilise against Sterling
- Some increase in crude oil prices mean increased revenue in many countries which are dairy customers
- Chinese demand has increased very substantially, by 28.7% in volume and 70% in value for August alone. Rabobank predict that the positive growth in Chinese imports will continue into 2018.
Source: CLAL[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]But there are also some headwinds:
- The UK economy is slowing with the uncertainty of the Brexit negotiations, and consumer inflation is up while wage growth is not keeping pace
- Geopolitical uncertainty related to North Korea risks destabilising the global economy
- Retail demand in Europe is marking a beat: consumers are proving resistant to high butter prices
Many European dairy farmers have continued to benefit from milk price lifts for September and October supplies, on the strength of good overall market returns underpinned by butterfat and cheese.
Friesland Campina have increased their October milk price by 1.25c/kg to 41.75c/kg. Arla have increased theirs by 1c/kg which in the UK, with currency and other factors included, translated into a 1.5ppl price increase to 32.3ppl.
In Germany, the IFE institute’s calculated farm gate price equivalent for August (based on SMP/butter only) has risen further to 40.8c/kg.
Are Irish co-ops being too cautious?
In Ireland, co-ops pay in retrospect: the price decided this month for last month’s milk supply.
And the two board decisions which have been made as we write show signs that, at least those two co-ops have become more worried and cautious – hence Glanbia held their September milk price – though this is after having paid a 1cpl bonus on all first half supplies – and Lakeland only gave a 1c/l “butter bonus” for September supplies only.
Will other co-ops show a little more ambition?
[vc_row][vc_column][vc_column_text]Dairy Market Blog – 11th September, 2017
How high will butter prices go?
Severe shortages of butter have developed around Europe, especially for the food processing/food services trade, and prices have continued to lift beyond historical levels with little or no prospect of additional supplies for the short term – what with being past Northern Hemisphere peak, not yet at Southern Hemisphere’s, and with reports that the wet spring may be affecting volumes in New Zealand.
French bakeries have been vocal about the shortages and the price pressure, with reports of 10c price increases on croissants in many of them. Croissants are made with around 25% butter, so the impact is significant.
The shortages (and the price uplifts) appear less noticeable in the retail trade, where traders have reported resistance to wholesale and retail price increases.
From early May 2016 todate, average EU butter prices have increased from €2500/t to €6390 – a whopping 155% or 2.5 times increase.[/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]Dutch spot butter prices on 6th September came in at €6950 – within touching distance of €7000/t.
So, just how sustainable are these very high butter prices? Well, probably not for the medium to long term, even if they are maintained for the next few months by supply shortages.
Industrial purchasers of butter, in the face of very high prices, will at some point consider re-formulating their recipes to use vegetable oil, as the already sizeable differences in price is growing with butterfat price inflation. Also, as stated previously, while butter retail prices have increased, they have not increased in proportion to the wholesale prices.
So, why have butter prices risen so much so fast? First, there has been generally less milk produced internationally this year than was earlier expected. Second, the price of SMP (the “companion” product made with the same milk as butter) has been depressed, so when butter prices were less high, the balance of the two products did not pay processors. Third, hot weather around Europe this summer has increased ice cream and cream consumption, leaving less for processing into butter.
The manufacture of both SMP and butter in Europe is well down. For the first half of 2017, over 10% less SMP was made, and over 6% less butter.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]As a result, returns from EU commodities as reported by the EU Milk Market Observatory for 3rd September, despite lower SMP and WMP prices, have risen slightly further, to just above 41c/l before processing costs.
Returns continue to justify price increases
Assuming a 5c/l deduction for processing costs, this is equivalent to just over 36c/l + VAT based on the data recorded for 3rd September (see table below).
Of course, this does not necessarily reflect the returns obtained by Irish co-ops in real time. Some of their contracts will return more or less for some commodities. However, it is an indicator we follow on an ongoing basis, and it has clearly tracked the fact that strong butterfat prices continue to make up for lower SMP prices.[/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]Irish butter and SMP prices as reported to the EU MMO for the same date (3rd September) were both below EU levels – below intervention levels in the case of SMP at €1660/t (intervention buying in price in €1698/t) . However, combined with the EU average prices for the other commodities, the gross returns before processing costs are just over 40c/l – equivalent to a milk price of 35c/l + VAT
Comparing the Irish milk price paid for July with some of the European indices show there is some scope for continued increases – even if the Dutch spot milk price and the LTO league are based on a butterfat level of 4% or slightly higher.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Note: Dutch spot price is ex factory, constituent levels vary[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]International August/September/October milk price round up
- Dutch Friesland Campina has lifted its September “guaranteed” price 2c/kg to 40.50c/kg to reflect market returns and the price evolution from its main European competitors;
- Arla have already announced a 1c/kg increase for September milk, citing also the fast rising butterfat value. For British member suppliers, this will be equivalent to a price of 30.79p/l (33.00c/l at current exchange rate);
- Also in the UK, First Milk increased their September price by between 1 and 1.1ppl, to levels of up to 29.05ppl (31.6c/l). Meadow Foods have announced a 0.85ppl price hike to 30ppl for October milk; Muller also increased their October milk price by 1ppl to 30ppl (32.6cpl);
- In France, where price increases have been relatively slow until now, largest milk purchaser Lactalis has increased its September A price to 36c/l, following an August price of 35c/l, and a July milk price of 34c/l; The regional price for A milk in East Brittany for September and October has been confirmed at 33.7c/l.
- German milk purchaser DMK +2c/l for August to 38c/kg;
- Further afield, in New Zealand, ASB Markets predict that the stronger butterfat value could lead to an increase in the Fonterra 2017/18 forecast to NZ$7/kg (around 30.4c/l).
[vc_row][vc_column][vc_column_text]Downward EU production trend set to continue
With the EU Milk Market Observatory still stuck on the May figures, Rice Dairy International, a US based dairy risk management consultancy firm, have extrapolated the fresher statistics available from France, Germany and the UK, which between them represent 47% of total EU production, and come to the conclusion that the slower trend would continue into June and July.
All three countries are down 2.43% for the year todate. Extrapolating from their most recent weekly data, the Rice Dairy model predicts June EU supplies should be down 1.43%, and July supplies (based on only 2 weeks’ data) down by a further 2.33%.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Rice Dairy International[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Analysts from Rice Dairy present these figures in detail in the video here: https://www.youtube.com/watch?v=RrGz1FnObfg&feature=youtu.be
In the Netherlands, the impact of the herd reduction scheme is continuing to be felt into May, albeit in a limited way. Output is back 0.58% on the same month last year.
Some countries run against this trend however, not least Ireland.
June Irish milk supplies were up 6.1%, with supplies for the year to June up 6.6%, as reported by CSO (see right).
Source: CSO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Global output trends a more complex picture
In the US, third quarter milk supplies were up 2.09%, however, the forecast for the fourth quarter is for similar growth. The annual volume forecast has been revised slightly downwards between June and July, however, from +2.02% to +1.83%.
In New Zealand, the May supplies in tonnes of milk were down by 0.73%. Production for January to May 2017 was up by 2%, but because of lower output trends in 2016, the 16/17 season is believed to be closing 1.1% below the 15/16 season. Reports from the new season, starting June/July suggest that while higher prices have improved confidence, the wild and wet weather experienced in recent weeks has caused its own difficulties.
A confidence survey by Federated farmers of New Zealand suggests stronger optimism, with 1/3 of farmers expecting production to increase on their farms in the new season. The proportion of farms making a profit has doubled to 55.4%.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy prices: gap between butter and SMP continues to grow
Whether on global or EU markets, butter prices are continuing to rise in reflection of tight stocks and shortages of fresh product, while SMP prices weaken under the influence of the 350,000t remaining in intervention.
Analysts commenting on this week’s GDT auction, which saw a 1.6% downturn, have expressed no surprise at the 4.9% slippage in butter prices. Some of them even expect to see a return to butter price increases because of the very severe shortages.
ASB economist Nathan Penny said prices were consistent with its forecast $6.75kg/MS for the 2017-18 season.
“Taking a step back, it’s not altogether surprising that milk fat prices took a breather, given the price explosion over recent months. Butter prices, for example, have surged over 35 per cent this year, while anhydrous milkfat prices have lifted a more modest, but still robust, 18 per cent. Both butter and AMF have set multiple auction record highs over 2017.”
“However, we suspect that the slowdown in milk fat prices may be temporary. Demand continues to surge and inventories are now very tight. As supply struggles to keep up, we expect that any further lift in milk fat prices will lift dairy prices more generally. Such a lift would break WMP prices out of their holding pattern of recent months,” Penny said.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: GDT[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]European dairy prices as reported by the EU MMO have shown a continuation of the butter price increases, and of the SMP slippage.
Butter prices for the week ending 23rd July (the most recent available figure as we write) had increase to €5770/t on average across the EU, albeit with significant differences from country to country.
Hence, the Irish butter price was at a significant discount from that for the same week, at €5190/t. SMP prices were closer, with the EU average at €1810/t and the Irish at €1790.
In recent weeks, butter price increases have somewhat made up for the weakening of other products, not least SMP and whey powder. Returns on the basis of a representative Irish product mix have hovered around 40-41c/l gross, so equivalent to a farm gate milk price of 35c/l + VAT.
Factoring in the lower Irish reported prices for SMP/butter, and using the EU averages for the other elements of the product mix (because the EU MMO doesn’t publish individual country prices for those), those gross returns are slightly lower at around 39c/l before deduction of 5c/l processing costs or 34c/l + VAT as a farm gate equivalent.[/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]Spot prices: some firming of SMP this week
Sport prices reported this week by FCStone international are showing a continued uplift in butter prices in Germany and the Netherland, with stable levels in France. Average butter sports are reported up to €6300/t.
Even more interesting is a slight pick up in SMP prices in Germany and France, and stable levels in the Netherlands, when SMP spots had been weakening significantly in recent weeks.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: FCStone International[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk spots: the rise continues
Spot milk price in the NW of France (Brittany, Normandy and the Pays de Loire, the most dynamic milk production regions in France) was up to 37c/l.
The Dutch and Italian spot prices reported by the EU MMO have also increased further, to €40.5/100kgs and €43/100 kgs respectively.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Farm gate milk prices: European competitors are continuing to benefit from stronger returns
European milk purchasers have been increasing July and August milk prices, with Friesland Campina the most recent to announce a 1.5c/kg increase to its August milk price to 38.5c/kg (graph right)
In Irish constituents, this would be equivalent to 32.7c/l + VAT (34.5c/l incl VAT).
Largest French milk purchaser Lactalis, a private company, have announced an August milk price of 35.1c/l, with an expectation of 36c/l for September.
Arla have increased their August milk price by 1 c/kg, which translated into an Arla UK price increase amounts to 0.89ppl. This takes the standard litre price to 29.98ppl (33.31c/l at current exchange rate).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Friesland Campina[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk prices – scope for further increases to ensure Irish farmers keep up with EU competitors
Based on the May Farmers Journal Milk Price League, we predict the soon to be published June League will show an average price paid by Irish co-ops of 31.9c/l + VAT (33.62c/l incl VAT).
The graph below tracks the prolonged period of challenging milk prices which has been experienced by Irish dairy farmers. Since the trough of exactly 12 months ago, prices have substantially recovered by an average of 9.4c/l. However, they remain below the highest prices seen by farmers in 2014.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
*June 2017 – IFA estimate based on FJ May milk price league[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Current market returns and the positive outlook for the coming months, underpinned by lower than expected milk output, especially in the EU, would suggest that further milk price increases are both justified and realistic.
Teagasc’s expectations of significant dairy income improvements this year are no surprise with higher volume, good grass growing conditions, a relatively benign cost environment and recovering milk prices. However, this comes after a prolonged period of low prices and cash flow stresses, which farmers are only catching up with now. See our press release on this here: bit.ly/2v1wCic
IFA urges co-op board members, when they meet in the coming days to decide on their July milk price, to increase it by a minimum of 1c/l.