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[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.

Finally, in South America, Argentinian milk output is down 6.3% for the Jan-June period.[/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]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 16^th July GDT auction saw a strong recovery of most product prices, but especially the strongest trading ones, namely WMP and SMP.

These latest increases mean that the GDT price for SMP is now 9% above the EU MMO average, while GDT butter is 2.5% higher.[/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]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

Based on EU MMO Data[/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]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 15^th July last.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

 

 

 

CL/IFA/1st August 2019[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]Global dairy output is down, intervention stocks empty – so why aren’t we seeing more market optimism?

2019 global milk supplies to May were estimated down 0.3% (down 0.4% for May itself), with US production static, New Zealand down as the season comes to a close, Australian supplies sharply reduced, Argentinian output well back, and only EU production up very modestly.

The forecast for the rest of 2019 (see graph below) is for a switch from mid-year to a trend slightly above 2018, with a stronger recovery as we move to year-end trough.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Private butter stocks have been reported as higher than normal, but intervention stocks of SMP are now empty, with the last 162t sold on 18^th June for a minimum price of €1759/t.  This is a total of over 405,000t of SMP now gone out of intervention and most likely by now fully absorbed by the market.

So why are dairy prices and market sentiment gloomy, and is the pessimism justified?

Is demand depressed?

With supplies subdued in almost all production regions, it is logical to consider whether depressed demand is what affects market sentiment.

Recent high butter prices were always difficult to sustain when they were difficult to recoup from the retail or food services chain.  But those have fallen back from up to €7000/t in 2017 to just under €4000/t.  And these lower prices appear to start to have an impact: while EU retail demand for butter had been sluggish, there are now reports of retail demand recovering.

This is a quick round up of the state of demand in the main regions, courtesy of Ornua:

• Demand is reasonably good in the following regions:
• North America (US) have seen weaker exports (reflecting weaker milk output), but domestic consumption of butter and cheese in particular is on the up, with SMP consumption also rising.
• North Asia, including China, saw a significant increase in imports, by 13%. This was majorly influenced by China’s increased imports of powders and liquid milk.  The African Swine Fever impact on the pig herd, however, has reduced significantly the imports of whey for pig feed.

Chinese dairy imports – January to May 2019

Source: CLAL.it

• In South East Asia, import demand was up strongly a +11%, but the rate of growth has eased somewhat since. Powder and soft cheese imports have been strong, while butter, hard cheese and whey were weaker.

 

• Demand is muted to stable in the following regions:
• EU domestic demand is muted for cheese and butter, though as previously stated there is some response from retail sales due to lower butter prices. Whole milk powder use remains solid, though SMP consumption is weaker.
• South America (see more re. Mercosur below) started the year strongly with imports, and while demand eased somewhat for WMP, whey and SMP in March and April, cheese and casein demand has remained strong

 

• Demand is somewhat problematic in the following regions:
• Total African imports are down 5%, though this does not include enriched milk powders, (fat filled milk powders) which are offsetting somewhat the lower SMP and WMP sales. Also, cheese demand does continue to rise.
• Middle Eastern demand for WMP is poor, though SMP and butter imports are growing somewhat. There are signs of import improvements for most dairy products.

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]What are the factors impacting demand?

Global economic growth is forecast to fall this year, because of economic weaknesses in developed countries and in China.  China is currently recording the slowest economic growth rate in 27 years, at 6.2%.  It was telling, last month, that IMF Managing Director Christine Lagarde was urging the US and China to sort out their differences to reduce the risk of a global economic downturn.

Despite a recent decision by OPEC to reduce crude oil supplies, prices remain around US$65/barrel, again kept down by concerns around global economic growth.

The € is stronger against both the US $ and Sterling (Brexit uncertainty), affecting the competitiveness of EU exports.

Traded volumes have been generally strong in the first two quarters of the year, but there is a view that this will slow down in the second half because of trade wars and the build-up of (private) stocks.  Such stock build-up has been caused in the UK by the preparation for 2 Brexit deadline (the next on 31^st Oct, and the risk of a no-deal deemed to be greater, stock build up will not be resolved in the short term).

The main drivers of this strong first half demand were developing countries, and it is good to see that demand in developed countries (EU and US) is improving.

So, while most reports do not suggest very strong growth in demand at this point, they do not suggest that there is a major demand downturn.

It seems that markets are nervous because of international economic and geopolitical factors that have yet to impact (Brexit, US erratic trade policy and an expected lower growth in the Chinese economy all come into this).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Dairy returns comfortably underpin current milk prices – June Ornua PPI is 1c/l above most co-ops’ milk prices

Average EU dairy prices as recorded by the EU Milk Market Observatory for 7^th July showed very slight price improvements for butter, SMP and WMP.  During June, only very slightly easier gross returns compared to May were mostly in excess of a gross 35.5c/l before processing costs.

Overall, the notional Irish product mix, after deduction of 5c/l for processing costs, would return a farm gate milk price equivalent of 30.36c/l + VAT (32c/l incl VAT).   This represents a very slight easing of under 0.5c/l during the month.

 

Based on EU MMO data[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Other indicators have also eased a little, as is shown in our usual table keeping tabs on the main international and national (Ornua PPI) indicators.

Speaking of the Ornua PPI, it has eased by 1.6 points for June trade, down to 105.7, equivalent to a milk price of 29.98c/l + VAT (31.62c/l incl VAT) – which remains 1c/l more than what our main milk purchasing co-ops are paying for June milk.

 

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]IFA has tracked the milk price paid by the main Irish co-ops, using the Farmers’ Journal monthly milk league, and compared those with the evolution of the Ornua PPI milk price equivalent over the last 9 months.  With the exception of the West Cork co-ops, the other co-ops have paid less than the PPI for the majority of those 9 months.

Note: while as we write the June Milk League has yet to be published in the Farmers’ Journal, all those co-ops that have announced their price have held at May levels.

Based on Farmers’ Journal’s monthly milk price league and Ornua PPI milk price equivalent[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Strong support was provided by co-ops for farmers in 2018, in the form of milk price top ups, merchant credit and other rebates, and even fodder/feed imports.  These were as appreciated as they were needed.

However, it is clear that co-ops have not passed back the full of the market returns this year so far, banking on the impact on milk cheques of additional volumes and improved constituents to rebuild balance sheets.  They are also voicing much of the cautious sentiment highlighted above to create negative expectations for the next number of months, when the negative market factors have yet to materialise.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]And finally: the EU/Mercosur Deal and Dairy – (Analysis courtesy of IDELE (French Livestock Institute)).

There has been much commentary and press coverage about how the Mercosur deal is bad news for beef farmers.  But there have also been suggestions that it was a far more positive story for dairy.  Is that so?

French agri-economists at l’Institut de l’Elevage (IDELE), the French Livestock Institute, have published an interesting analysis, the dairy aspect of which is translated and summed up below.  By all accounts, the dairy story is less negative, but nor does it provide spectacular enough opportunities to make up for the likely impact on beef.

Definite potential for Argentina and Uruguay

Argentina and Uruguay are 6^th and 7^th world exporters of dairy products (1.8 and 1.7m tonnes of milk equivalent respectively).  Output has been growing in Uruguay, and there has been a recovery in Argentinian production after 2 years of crisis. Argentina trades mostly with Brazil, while Uruguay currently ships to Algeria, Russia and China.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: Idele (France)[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Argentina’s milk price is far lower than that of the other exporters, and made even more competitive by the devaluation of the local currency.

It is therefore clear that Argentina in particular would have a competitive advantage, starting, just like for beef, with a significantly lower raw material price (milk).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: Idele (France)[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]However, the EU has equivalent opportunities to export more into Mercosur countries (the quotas agreed are reciprocal).

The same concerns arise regarding differences in standards as are relevant to beef.

Mercosur and dairy: extra volumes at lower tariffs

The dairy concessions under the EU-Mercosur deal are bilateral.  Each party will be given the same opportunity to export to each-other’s market tariff free, after a transitional period of 10 years – i.e. within quota tariffs will be lowered by 10 % p.a. from their current levels.  Dairy import tariffs average out at around 28% of the EU price for the product currently.

The volumes concerned are 30,000t cheese, 10,000t milk powders and 5,000t infant formula.  There has been no further details as to what type of cheese, or as to the divvying out of the export opportunities between countries in either group.

This is not in the IDELE document, but it is worth noting that there has been no import of SMP, butter, cheese, WMP or whey powder from the Mercosur countries into the EU in the last number of years.

Exports from the EU to the Mercosur country are tiny, with only 900t of whey powder and 100 t of WMP exported to Brazil in 2018 (and this reflects a normal enough historical trade pattern).

Validation of the agreement

The Mercosur/EU trade deal is expected to be, similar to the Japan agreement, a simple trade deal which does not require individual member states’ approval.  For implementation, it must be adopted by the EU Parliament (blocking minority is 35%) and Council (qualified majority = 55% of MS representing 65% of the population).

There remains many technical details to be sorted, as well as evaluation work before any votes in Parliament and Council, and this could take around 2 years before ratification and implementation actually begins.

So any impact from Mercosur, good or bad, will be some years down the line relative to a Brexit outcome!

Note: while the above on the validation of the agreement reflects the IDELE analysis (and the presentation of the Deal by the EU Commission), some hold the view that the deal is not a simple trade deal, because it includes intellectual property considerations (protection of Geographic Indication for up to 350 products, for example).  Should this be the case, there may be a legal argument that the deal does indeed require approval by individual member states, which would give every member state an effective veto.  Watch this space!

CL/IFA/15^th July 2019

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[vc_row][vc_column][vc_column_text]A turn around for the better?

EU powder prices reported by the EU MMO and average spots in the Netherlands, Germany and France have resumed their increase.  SMP spots have now broken the €2000/t barrier, with average EU prices close behind.  Butter prices, on the other hand, are somewhere between stable and slightly easier.  On the international stage, GDT is on its 11^th consecutive positive auction.

Is global scarcity impacting prices?  Is intervention SMP finally working its way through the market place, after leaving EU stocks in recent months?  Is the kicking of the Brexit can to next Halloween at least buying us time of normal trading conditions, at best making a crash out Brexit less likely?[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Improved prices

One thing for certain: all the indices industry watchers monitor are on the up.

To start at home, the Ornua PPI for April has lifted from 104.1 points for March to 105.9 points.  This is equivalent to a milk price of 30c/l + VAT (31.6c/l incl VAT), an increase of 0.6c/l on the previous month, and a little more than many of the main milk purchasers have been paying for March milk (see graph below).[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: Ornua[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The average EU MMO prices for week ending 5^th May saw increases in milk powder prices, and a slight settling of butter, cheese and whey powder.  The upshot is that the returns for the notional Irish product mix in the table right is 36c/l before the deduction of processing costs.  Assuming our usual notional 5c/l, this would be equivalent to 31c/l + VAT or 32.67c/l incl VAT.  Again, 1 or 2 c/l above what the main milk purchasers payed for milk in March.[/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]Other indicators have also continued to improve, not least GDT prices, with the auction platform registering last week its 11^th consecutive positive index movement, but also European spots and futures.

The GDT index is now 28.4% up on last November, with the most noticeable element the continued improvement in SMP prices, to a current level of $2521/t.[/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]EU Spot prices have shown a recent resumption of SMP price increases, perhaps suggesting that SMP stocks sold out of intervention have by now mostly been absorbed in the market place.  Latest EU spots showed SMP breaking the €2000/t barrier, at €2023.  Butter prices are settling around €4150-4200 for the moment, with whey powder slightly weaker.[/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]As to current expectation of September 2019 prices from the EU futures markets (EEX), they predict a butter price of around €4370/t – slightly less than recent weeks’ expectations – but a SMP price of around €2,200, slightly up on previous results, and 10% above current spot market quotations.

The table below shows that the combination of those futures prices would yield a notional price of just over 34c/l + VAT.[/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]What underpins the stronger prices?

We’ve seen for a number of months now that global milk output has grown by a lot less than expected, and crucially at a lesser pace than demand is growing.

Supplies of milk in the 7 most important export regions (EU, US, New Zealand, Australia, Argentina, Brazil and Uruguay), as reported by Rabobank in its Q1 2019 Dairy Quarterly Report, grew by a mere 0.1% for the first quarter.

The main reasons have been weather – drought and other inclement events –  and price related – producer prices have been falling in the last year, and no longer cover costs in many regions.

For the EU, Rabobank expect milk supplies to only start picking up in the second half of the year – which will be well past peak.

Source: Rabobank 2019 Dairy Quarterly 1[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In the US, supplies are challenged also by economics, and prospects are poorer due to international trade challenges, especially caused by the Trump administration’s approach to trade with China.

New Zealand March milk supplies fell a dramatic 7.5% (9% for Fonterra), with Rabobank predicting lower growth for the rest of the season due to moisture deficit encouraging farmers, especially in the North Island, to dry off earlier.

In South America, production is on the up, but prices are poor, and local demand challenged by difficult economic conditions.

Finally in Australia, production is continuing to fall as margins continue tight despite some improvement in milk prices.

In China, imports have continued strong, with double digit growth expected for all of the first half, possibly more moderate in the second half.  Disease has cut back significantly pork production, which is both good and bad from a dairy consumption perspective: pigs consumer quite a bit of whey, so imports of that commodity will likely decrease.  However, pigmeat being one of the most important sources of protein for Chinese consumers, alternative protein, including dairy, will see an increase in consumption as pigmeat gets scarcer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The recovery in the supply/demand balance has been further favoured with a rapid disposal of SMP out of intervention stocks. A total of 378,600t were sold since sales began (very, very slowly!!) in December 2016.  Most recently, 33 tonnes were sold on 16^th April at the maximum offered price of €1660/t, leaving 1106t for sale at the next tender of 21^st May.  What is left of the stock is held in Spain (510t), the UK (389t) and Slovakia (207t).

For some time, however, the view among commentators was that though the product was being sold out of intervention, it was taking time for it to be absorbed by the market, and therefore it continued to influence and restrict price increases for the fresh product.  It does look now like that effect has come to an end.[/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]So, should we see better Irish milk prices soon?

Logic would suggest that we should.  And this would be particularly important as peak milk production months are now upon us, and those larger milk cheques are critical to every dairy farmer in dealing with the still outstanding bills incurred during 2018.  While many co-ops provided much appreciated support in merchant credit facilities, rebates and even fodder imports when it was so badly needed, those bills must now be paid.  Farmers need every possible cent for the milk they produced last month, and for what they will be producing over the summer.

In the graph below, we compare the prices paid by the main co-ops for March 2019 as recorded in cents per litre in the Farmers’ Journal Milk League, and we compare them with some of the most relevant indicators we have already reviewed.

Some are paying less than the Ornua PPI, and only the West Cork Co-ops are matching (more or less) the current EU spot prices’ returns.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Sources: Irish milk prices from Farmers’ Journal March Milk League; various other indicators as per table above.

 

CL/IFA/13th May 2019 [/vc_column_text][/vc_column][/vc_row]