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IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.
Dairy Market Blog – Dairy prices stable to firm
Market returns, after falling steeply between February and mid-April due to the impact of COVID19 on food services and trade generally, have been rallying since May. In recent weeks, spots have stabilised at those improved levels. While they have a way to go to recover to pre-COVID19 levels, they nonetheless support current price levels comfortably, as is obvious from the gross returns/milk price equivalents from the main market indicators in the tables here.
Based on EU MMO data
GDT: mostly Oceanian product trading
Many will have been worried by the 5.1% drop in the average GDT index in the first auction in August earlier this week. The first thing to note is that trade concerns mostly new season Oceanian product for the period from Sept to December 2020. Very little powder and no butter from European traders featured in this event.
Also, August does tend to be a summer holiday month the world over. Serious trading decisions regarding the really heavy trading period – the last quarter of 2020 and first of 2021 – which gathers most of the demand promoting events and religious festivals (Thanks Giving, Christmas, Passover, New Year, Chinese New Year, Easter, Ramadan…) will start from autumn, after the summer holiday period.
So, we should not read too much in this month’s GDT results.
Global milk supplies subdued till May, now picking up
US milk supplies for June were up a massive 5% compared to last year, but that followed an equally steep 5% drop for May.
EU supplies were up 1.3% to May, leapyear adjusted, with the EU Commission predicting an overall increase for 2020 of just 0.7%, which would suggest tighter supplies for the remainder of the year.
New Zealand production for June – the trough month – was up 2% on June 2019. Jan to June was up only 1%, but we are now in the new 2020/21 season.
Australian milk supplies for May were up a whopping 6%, following a series of monthly increases since January. Season todate, however (July 2019 to May 2020) is down 0.6%.
Source: AHDB Dairy UK
Demand continues to be sustained by COVID19 supports
Just as the Irish government has brought in a July stimulus package, so have various governments around the world extended (or not!) the initial COVID19 supports targeted to businesses, employers and employees. Those have played a crucial part in sustaining purchasing power and therefore demand, including for food and dairy.
Trade has resumed, with Chinese imports a mixed picture for June and the year to June. Butter and AMF (butteroil) are doing quite well, while powder imports are weaker and infant formula just marks time for the year to June.
Whey powder and whey protein concentrates and lactose also appear to do quite well.
EU exports of butter and WMP have performed well, through the pandemic, with other products a less positive picture.
Butter exports for January to May rose a whopping 37% with WMP a more measured 8%. SMP was down 17%, with cheese down 4%.
Outlook for milk prices?
In the rest of Europe, milk prices are recovering after steep falls.
Friesland Campina’s guaranteed prices has increased for July by €0.5/100 kgs, and by €1.00/100kgs for August. Over those two months, that is equivalent to around 1.25c/l at Irish constituents over those two months. The August milk price, at Irish constituents, would be equivalent to 28.5 + VAT (30.05 incl Irish VAT at 5.4%).
Arla UK will pay 29.26ppl for August milk, which at Irish constituent level is equivalent to 29.33c/l.
August milk prices for French suppliers to Sodiaal Co-op hover around 34c/l (3.2-3.8 constituents) and 36c/l (3.3-4.2 constituents) in Savencia. Those prices include seasonality bonuses, and are an increase for Sodiaal, and same as July for Savencia.
Irish milk purchasing co-ops (see table right, based on the cents per litre column in the monthly Farmers’ Journal League, which is not ranked on that column, but on the value of solids in €/kg) have increased milk prices in June by an average of 0.84c/l + VAT (88.5c/l incl VAT).
The simple average of the table for June suggests an average price of 29.11c/l + VAT (30.68c/l incl VAT). It is clear that this simple average is heavily influenced by the performance of the West Cork co-ops, all paying in excess of 30c/l + VAT – in fact the only milk purchasers to do so.
Source: FJ Monthly Milk League
The LTO milk price review for June 2020 (graph right) also shows that the Irish milk purchasing co-ops which participate every month, are around €1/100kgs (Kerry) and €2/100kgs (Glanbia and Dairygold) below the average milk price reported for the main European processors.
Source: LTO Netherlands/ZuivelNL
Commodity indicators as analysed above, would suggest that there is scope at least for the lower payers in the table above to further improve their July milk price. Anything less than 1c/l would be mean spirited, as volumes start to dwindle past peak.
What about the new PPI?
Ornua will be expressing their PPI slightly differently with effect from July, but as we write, this has not been announced yet. A lot of debate has taken place regarding the increase of 0.5c/l in the processing cost deduction which has been used since 2011 in the calculation of the milk price equivalent of the PPI, but unfortunately little more useful information has been discussed.
- The first important thing farmers should understand is that the prices paid by Ornua to co-op for dairy products will not be changed in any way by the changes to the PPI. To be absolutely clear, Ornua will not be paying any less for the products co-ops sell through them, and the new PPI should, objectively, have no influence on co-ops’ ability to pay a competitive milk price.
- The second thing is that the PPI will now reflect commodity returns only.
- The third important information is that the value of premium, non-commodity products traded for the month, together with the value for the month of the trading bonuses co-ops used to receive only annually in the past, will now be shown below the line.
Combined, these two values will be called the Ornua Value Payment (OVP). While the trading bonuses are achieved partially on the trade by Ornua of non-Irish products, they are an actual payment to all co-ops that trade through Ornua. The OVP will be paid monthly, generating a value which also contributes to the co-ops’ milk price payment capacity.
Ornua have decided to express the OVP as a single global monthly € amount, and a percentage of gross purchases in the month.
To help farmers better gauge the real value to co-ops of the OVP in terms that they can readily appreciate, IFA will endeavour every month to estimate that value in terms of the cents per litre it adds to the milk price equivalent of the PPI calculated by Ornua.
[vc_row][vc_column][vc_column_text]Lockdown exit and government stimuli promote dairy demand and boost prices
The total disappearance of demand from the food services market (cafes, restaurants, institutional restaurants and school canteens) which followed the quasi global lockdown in March has hit dairy markets hard. Dairy commodity prices plummeted: butter fell 24% between early Jan and early May while SMP fell 27% roughly over the same period.
Since then, the gradual reopening of economies first in Asia, then in Europe, has allowed demand to slowly recover as supply pipeline are being replenished and consumer demand for food services returns tentatively in the new, socially distanced “normal”.
In most of Europe, we have seen phased reopening plans speeded up as the public health statistics appeared to justify it. Beyond Europe, especially in Asia, the reopening of food services is even further advanced, and trade is reported by some operators as improving more than heretofore, with demand from food services recovering to over 50% of normal while retail sales remain very strong.
While some operators warn that this is linked to the refilling of pipelines depleted by the lockdown, and may slow when those are full again, others report a very real improvement in trade.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Based on data from INTL FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The table below shows that EU exports have continued strong for the month of April and the Jan/April period, with the exception of SMP. EU exports of butter, butteroil (AMF), whey and pharmaceutical grade lactose have all increased substantially over the period, despite the pandemic.
This has allowed dairy product prices to recover substantially, though not yet to January 2020 equivalents. This has also helped stabilised May milk prices in Ireland, with Dairygold actually increasing its payout by 0.5c/l.[/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]Most market indicators have been showing improvements since mid-April, though they remain below January 2020 levels. However, most would appear to have reached levels that would underpin current milk prices, and possibly a small improvement. In the first table, the EU MMO average returns are given gross, before deduction of processing costs.
The first table below shows the gross (no processing cost deducted) returns from a representative Irish product mix, based on the most recent available prices reported by the EU Milk Market Observatory.
In the second table, showing the main national, EU and international dairy market indicator, returns have been calculated, to factor in a nominal 5c/l deducted from the returns to approximate the milk price equivalent of each indicator.
This is a convention rather than a precise processing cost: those are not independently published by any dairy company anywhere around the world. What is most valuable about monitoring indices is their evolution and changes up or down, as well as the pace of their change, so trends, rather than the absolute numbers.
The second table below shows that some returns have recovered up to half the fall that occurred between January and mid-April, and most appear to be still on an upward trend – which should augur well for at least the stability, or even improvement, of milk prices in the short to medium term at least.[/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]Milk production rising to April, but…
With a lower than expected fall in milk prices and significant supports in the US, production has been rising more strongly into April in all regions except New Zealand.
Global April milk production is estimated to have increased 1.3% when compared to the same month last year.
Source: Bord Bia[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]European supplies have shown a similar dynamic, with April production up 0.8% and output over the January to April period up 1.6% leap-year adjusted according to the EU MMO, with significant differences between Member States (see graph below).
The April/May challenge to European production linked to moisture deficit has started to correct itself during June, with rain fall increasing in the most affected areas. However, it may be a case of too little too late for some regions, where it would have already impacted fodder production for the year.
Looking in more detail, the French April production reduction initiative appears to have borne fruit right till May, with output rising by only 0.6% in April, and falling into May. For the period from 1st April to the first week of June, INTL FCStone estimate French milk output was back 1.3%.
UK milk supplies, which the EU no longer accounts for as part of the EU 27, were also down 1.8% for the January to April period.[/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]APS provides mixed levels of support
As well as a slight moderation of some of the late spring/early summer output from some of the main dairy EU member states, we have seen some use of the EU Private Storage scheme which remains open for application till 30th June – and this will have had the effect of taking product temporarily off the market, especially butter.
The Cheese APS, which failed to recognise appropriately the importance of cheese to the Irish product mix, and only allocated Ireland a miserly 2180t filled within 3 days of the 7th May opening, is only 44% utilised todate – with only a few days to go to the closing date. While the Irish government has sought an opening of all allocations to allow for more use, this does not appear to have been accepted by the EU Commission.
Perhaps more helpful is the butter scheme, which has taken in almost 55,000t todate, with Ireland contributing 11,709t. Commentators suggested that maybe as much as a quarter of all butter made during the period went into APS – which would suggest optimism as to the price level to be expected when the product must come out next autumn.
The SMP scheme was only used to the tune of 13,178t, none of which from Ireland.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
|Source: CLAL.it based on CME|
Massive US supports have also helped April to June dairy market improvements
In a recent global dairy market webinar by INTL FCStone, one of the US analysts stated categorically that the massive levels of supports given by the US Government in a bid to offset the disastrous economic impact of COVID 19 on US farmers’ prices and incomes had played a determining role in sustaining dairy prices globally.
Put more clearly, he suggested that the supports provided, which saw massive government food purchases, ensured that dairy commodity prices were supported, and massive price drops were could be corrected, avoiding a generalised collapse. The graphs for US butter and cheese prices show the impact of the purchasing supports very clearly.
Source: CLAL.it based on CME
Major direct supports were also paid to farmers – especially dairy farmers – but probably the most influential supports were connected to food purchases by government for distribution through food banks to needy Americans.
[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Also underpinning consumption, just like in most developed countries, significant supports were also given to employees and employers, including enhanced unemployment benefits to furloughed employees, and loans to employers, some of those becoming grants where jobs were preserved.
All of these sustained levels of internal demand which would have collapsed without them because of the economic impact of COVID 19.
A total immediate government relief programme of $19bn was spent in majority on direct farmer support, as follows:
- $16bn on direct support to farmers and ranchers based on actual losses
- $100m per month of purchases of dairy products for distribution (with other foods purchased under the same programme) through food boxes to US citizens in need;
- An additional $873.3m funding to purchase a variety of agricultural products for food banks;
- An additional $850m for food bank administration and USDA food purchases (of which a minimum $600m to be spend on food purchase)
- A variety of rural supports for loan deferment programmes, 100% grant projects;
While dairy markets are performing better and returning improved prices, some commentators, not least Rabobank in their second Dairy Quarterly report for 2020, point out that the global economy will likely suffer a recession as governments in developed and emerging countries taper off the massive level of support they have given SME employers and employees.
The purchasing power of consumers, and their willingness/ability to spend will be challenged, which will likely impact consumption negatively.
For Ireland in particular, and Europe more generally, there is the small matter of the apparently increasing likelihood of a no-deal Brexit impacting from 1st January 2021.
However, the supports are unlikely to peter out too soon in the US, at least not this side of the next Presidential election in November.
In Europe, the COVID 19 support scheme of €750bn is in the process of being agreed by EU Member States, and should help kickstart recovery plans in all EU countries post COVID19 lockdown.
The market will continue to be difficult to predict. However, there is no sense in looking too far ahead in the context of an unprecedented pandemic.
For now, dairy markets underpin reasonably comfortably our current milk prices, and may even justify improvements.
Watch this space!
More milk, challenges on demand – but improved mid-term outlook?
After up to 2c/l in March, most co-ops have by now announced a 1c/l cut on April milk. This is quite a blow coming up to peak. Assuming no further adjustment, and over the peak months of March to June inclusive alone, that is up to a €6500 loss for an average dairy farmer producing 500,000l.
There is little doubt that market returns have been affected by the impact of COVID19 on global demand. Food services closing practically overnight the world over has resulted in milk in search of an outlet going to create surpluses in other areas, and putting pressure on commodity prices.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In addition, milk supplies have been increasing this spring in most regions except New Zealand in the first quarter of 2020 – total additional output for the period is estimated by INTL FCStone at 2.6%, and by Ornua at a more conservative 1.4% for the top five production/exporting regions compared to the same period in 2019. The difference in expectation for March are narrower, with FCStone indicating 1.58% and Ornua 1.4%.
The significant increase in US production for the period is particularly remarkable, bearing in mind the crash in milk prices, and the fact that farmers in some states have had to dispose of milk. The Australian increase follows months, if not years of decreases. More important are the significant increases in EU milk production, nearly 2.5% for the first quarter, though more modest at 1.12% for March. Many take the view that significant milk price falls almost the world over in the first half of the year will contribute to more modest output growth in the second half.
Source: INTL FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In the EU too, all countries have seen output increases, with few exceptions, namely the UK and to a lesser degree, Denmark for the month of March.
Source: INTL FCStone[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
It is worth noting however that the two largest producers, namely France and Germany have experienced only modest growth in March. This modest trend has continued into April in both countries – see table right, which in the last three lines captures the first 3 weeks of April (15 to 17) for France on the left and Germany on the right.
French industry organisation CNIEL has expressed a view that production has been moderated in April, a month for which they received retrospective approval for the incentivisation to the tune of up to 32c/l of a 2 to 5% reduction in April 2020 production relative to April 2019.
Sources France AgriMer, ZMB (Germany)[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Demand meanwhile has been very severely impacted by the collapse in food services. In the EU and the US, retail sales have increased spectacularly as consumers eat all their meals at home – up 17% in Ireland for all groceries in the last 2 months according to Kantar WorldPanel – but not so much as to offset the difference. Product unused in food services cannot always be shifted directly into retail – e.g. catering size packs of semi-processed creams for cooking and pastry. However milk not processed into those products has found its way into other processing chains – say butter in the case of cream – where it creates product surpluses which put pressure on product prices.
Have dairy prices bottomed out?
Dairy futures and spots have been firming for the last 3 to 4 weeks, with average current market prices reported by the EU MMO a little slower to follow.
As demonstrated by the graph right, between the 8th April and 13th May, the average spots quoted for SMP in Germany, France and the Netherlands increased by €80/t or 4.2%, for butter by €160/t or 6.2% and for whey powder by €71/t or 11.2%.
There is increasing evidence that dairy prices may have bottomed out – unfortunately at a very low level, but still well above intervention equivalent.
Source: INTL FCStone/IEG Vu[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy returns down on January, but some firming
Returns are still quite a bit below where they were in early January, as is clear from the table right, and remain for most of them just a little below our estimate of Irish milk prices for April 2020.
However, there have been some (small) improvement in spots in particular.
A very limited APS scheme was reluctantly introduced by the EU Commission, with a budget of €30m for all of the EU’s dairy sector out of a total APS scheme of €76m. While it is clearly insufficient, the very fact that the EU has shown it would support the sector after giving very negative responses, has contributed to the bottoming out of prices, and in particular has helped remove the threat of SMP prices collapsing in short order to intervention level.
As we write (20th May), around 34% of the EU cheese for all countries (100,000t) has been utilised. Ireland had utilised its own very modest 2180t in the first few days of operation as had Italy, Sweden and the UK. They are now joined, by Spain, with the Netherland and Belgium have by now utilised ¾ of their own allocation.
Ireland has sought a reallocation of all unused quantities to boost its own very modest tonnage – but that remains to be seen.
A few countries have also put SMP into storage, with both more countries and more volumes of butter being stored in both the first and second weeks, as outlined in the table on the right.
Source of data: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]However more than APS supports which are extremely modest, other positive market signals have been crucial to helping dairy prices first bottom out, and now hopefully firm up – at least for powders.
Firstly, there is the real prospect of food services coming back on line – very slowly – as countries world-wide progressively come out of lockdown and re-open their economies and societies. In Europe, most countries have either already reopened their restaurant/café trade, or will do so before the end of June. The table below is a roundup of the planned or already implemented measures by the main European countries with regards to reopening at least certain aspects of the hospitality trade.
Source: European Presidents CCEF[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Further afield in China and the rest of Asia, where the progress out of lockdown is more advanced, food trade has increased substantially. For some markets, the pipelines are empty after the lockdown, and demand to to refill those is very significant.
Food imports are being prioritised into China, for example, and the figures for imports (right) show strong results for March, benefiting the EU (and the US) in particular.
EU exports for the first quarter of the year have been a mixed picture, but with butter exports particularly strong at + 37% with the main focus on the US and Saudi Arabia in this increase. EU powder exports have also benefited greatly from Algerian purchases of SMP (+21%) and Nigerian imports of WMP (+80%).
The US also imported 8% more cheese from the EU than in the first quarter of 2019.
Source: EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
GDT another positive
A further sign of more confidence returning to markets is this week’s GDT auction, which saw a modest index increase of 1%, but a spectacular 6.7% increase in the price of SMP – an increase which is consistently strong across the 5 contracts for which trade took place, with the strongest (+9%) for the first contract for June 2020 trade.
At -0.5%, the WMP price index was most positive for August 2020 trade (+1.7%).
While butter prices were disappointing at -1.9%, AMF (butteroil) was well up at +2.7%.
Lactose, which trades in very small volumes, was spectacularly up at 15.6%, and Cheddar cheese well back at -6%, with consistently poorer prices than in the previous auction at all 5 contracts it was traded for.
Source: GDT[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]What prospect for farmgate milk prices this summer?
After the major shock of up to 3c/l coming off the first two big months of the dairy year, and somewhat more optimistic prospects for dairy markets than was feared even only a few weeks ago, farmers could legitimately expect stable milk prices over the next few months.
Most co-ops, we have shown in throughout 2019 and into 2020, have undershot the most relevant indicators (including the Ornua PPI) for most of the last 18 months, and would therefore have some scope to hold prices while markets come back to meet them.
There remains some uncertainty, of course: Firstly, we do not know how long it will take for our food services customers to return to sufficient levels of normality after the COVID19 lockdown to constitute again a strong outlet for dairy products.
Secondly, we do not know the extent to which the impact of the lockdown on the economy will affect consumer purchasing power and demand.
And finally, the likelihood of a no-deal Brexit appears to have increased in recent weeks, as the UK refuses to seek an extension of the transition period which ends, reneges on its customs commitments between the EU and the UK with regards to the NI/UK/ROI situation, and as British MPs last week voted against a bill aiming to protect UK farmers in terms of food standards conceded on imports.
2020 will be a difficult year for farmers. Farmers will need support, from the EU and government in terms of market support measures and the provision of COVID19 related competitively priced working capital, and also from the perspective of achieving the best possible deal on Brexit, and should no deal be doable, to be supported in coping with the impact on markets and prices.
But they will also need support from their co-ops. The fact is that with COVID19 has created a huge challenge on the sector, which boards, management teams and most of all workers in co-ops have managed remarkably, by collaborating on complex re-organising and contingency plans which farmers are fully appreciative of. As a result, every drop of milk through peak is being collected and processed, which is crucially important for farmers.
Beyond this, however, co-ops must do everything in their power to hold prices at the highest possible level. The medium-term outlook is better than, or at least not as bad as, was earlier predicted. Farmers will need their co-ops to look to costs beyond milk prices, and just like farmers are having to do, reconsider their margin expectations for the year.