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]What outlook for 2018?
2017 will go down as a good year for Irish dairy farmers – albeit one which was badly needed to catch up with the 2-3 previous years which took their toll on cash flow and put farmers to the pin of their collars to meet financial commitments.
Assuming volumes end the year up 7-8%, and prices average 33% above last year, the overall output value of milk for the country will have increased by around 43%. Early indications from Teagasc suggest the average dairy farm income for 2017 before the remuneration of the farmer’s own labour could be around €90,000. Of course, this has to be put in the context of the two very difficult preceding years.
And now that the year is almost over, it is fair to ask – what will the dairy sector look like in 2018? Where will dairy and milk prices end up? Crucial in this is the recovering global milk production, the continuing strong positive trends on demand and of course the looming presence of a 380,000t stock of SMP, bought into intervention during the crisis period of 2015/16, and in 2017.
Production recovering globally
Stronger prices in all milk producing regions have resulted in a return to output growth within the EU, including France and Germany. In New Zealand after a wet spring reduced August and September supplies, the peak month of October saw a good recovery – but now moisture deficit again challenges pasture growth.
So in the EU, September milk production was up 3.7%, and this has continued into the following month. October milk production is well up in most of the main producing countries. France output increased 5.5%, Germany’s by 4.8%, with cull cow numbers in Germany down 13.3% for the month of October. In the UK, where cow slaughters were down 6.2% for the month and 3.8% for 2017 todate, production was up 4.2% in October. Belgian production was up a massive 8.23% for the same month, while the Danish milk output was up 5.3%.
In New Zealand, the wet spring depressed early season production, but September output was back up over 2%, and the October collections by Fonterra were up 2.3%. However, FCStone international now report the beginnings of a severe moisture deficit, affecting the South Island more than the North Island, and potentially challenging production over the coming weeks.
In the US, production continues to grow into October, albeit at a slightly slower 1.4%, with California continuing to lose ground to Wisconsin.[/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: Oil prices up and China imports continue to climb
There is a positive correlation between oil prices and dairy demand, because so many of our Middle Eastern and African customers rely on their oil export earnings to afford food purchases, dairy included.
At around US$63/barrel, the Brent Crude Oil price has been firming since June/July, and is around what many in the dairy industry had flagged as the ideal balance between a high price which increases energy costs for the sector, and too low a price which challenges the export revenues of importing nations and the relative affordability of food imports for them.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Financial Times[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In addition, dairy import demand for the last year or so has increased significantly in Latin America, Asia and China in particular.
In Latin America, cheese and SMP were the most noticeably increased imports. They account for 42% of imports and were up a combined 15% for the 12 months to July.
In Asia outside of China, imports of SMP were also well up, as were fluid milk, fresh dairy products and cheese – combined, these were up 10% over the period.
Chinese imports increased a massive 34% in volume in September, and by 12% for the 12 months to September. Whole milk powder, infant formula and SMP experienced the strongest import growth, but all categories of dairy product imports were up.
The MEA regions, on the other hand, have seen demand ease somewhat, down 2% for the 12 months to July. Fluid milk, SMP and fresh dairy were however collectively up 10%, but this was offset by a fall in butter, cheese and infant formula imports. It is not unreasonable to expect that increased oil prices since those statistics were compiled may boost this in the coming months.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Source: Fonterra[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]All eyes on SMP intervention
SMP intervention has been opened and kept open at full or near full price almost full time between the start of the Russian embargo of September 2014 and the autumn of 2016. With prices weakening below buy-in levels during 2017, an additional 30,647t, none of which from Ireland, were bought in when theoretically this should not have been necessary (milk prices were rising, largely supported by sky-rocketing butterfat prices). The upshot is that we now have over 400,000t of SMP intervened over the period, of which 376,000t are in stock and overhanging the market.
There are a few things to know about this stock. Some of it, bought in 2015, is over 2 years old. There has been a lot of commentary around how it is losing value, is “degrading”, is turning from “food grade” to “feed grade” – all of which is often used to justify why it can only be bought at a significant discount, and all of which is leveraged by buyers who want to pay as little as possible for fresh product.
However, we have said this before in this blog, to be accepted into intervention, SMP must be of top quality standards. Intervention stores must also prove they are operated to the highest standards to preserve the product in the very best conditions. SMP is fat free, and protein is far slower to degrade than fat – WMP would degrade a great deal faster. Objectively, the 2-year-old powder in intervention stocks currently remains a top-quality food grade product.
The issue is not standards, whatever many in industry will say. The issue is supply and demand, and price expectations.
In 2017, the EU produced 10% less SMP than in the previous year, and exported 43% more – no doubt because lower prices made it easier to sell. However, this means that the current fresh SMP market is, if anything, undersupplied. Were it not for the overhanging stock in intervention, chances are that SMP would currently trade, based on low fresh supply and strong demand, somewhere above €2000/t, instead of €1520/t – the current average EU market price.
But buyers will always put a premium on “fresh” product over older, even if the quality is indistinguishable. And in a low-priced market, the buyer gets what the buyer wants: but just because we are in a buyer’s market does not excuse the badmouthing of what objectively remains a top quality product.
Another issue with SMP intervention is the policy to be pursued in 2018 with regards to buying-in without a “reserve”. The legal intervention regime provides that the first 109,000t purchased after prices falling below €1698/t from 1st March triggers buying in are purchased at the same fixed price. A tender system follows, which can depress the price below that. This time, the EU Commission, anxious to avoid further accumulation, are proposing to have no reserve, i.e. to introduce the tendering process from the get go.
This is worrying to IFA, as it would send a very negative signal to buyers as to the value of fresh as well as intervention SMP, and could further postpone a recovery in prices. It could also set a worrying precedent for the future CAP. We have expressed our views on this matter strongly to the Commissioner and the Minister for Agriculture and their respective officials. We will know very soon (next Monday) whether the EU Council of Agriculture Ministers agrees with this policy or share our concern.[/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]Dairy price trend easing globally
While EU butter prices have eased nearly €2000 from peak, they remain at historically high levels, apparently settling down around €5000/t.
The last GDT auction (the 200th, held on 21st November), saw prices of all products decrease, some significantly, including butter which fell 5.9%. SMP is also continuing to slip, with a 6.5% fall.
It is clear from GDT but also from other international price indices that the weak SMP prices are reflected (or reflect!) protein price weaknesses more generally. Casein, WMP, whey powder prices are easing internationally.[/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 spot prices this week reflected some further slippage in butter and SMP prices – which looked like settling in the previous week or two – but a very slight firming of whey powder prices – albeit at very low levels below €600/t.[/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]Current average dairy product prices are slightly higher than spots – unsurprisingly in an easing market – and there even appears a small “bounce” in butter prices which in the most recent report averaged at €5330/t – up €210/t over two weeks. With EU butter production down 4.6% in 12 months ending in September, the relative shortage continues, so that prices are not likely to fall dramatically in the short term at least.
The small butter bounce is not enough however to avoid a disimprovement in returns. Gross returns for a representative Irish product mix, based on the average prices reported by the EU MMO, would amount to 36.36c/l before the deduction of processing costs.[/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]Co-ops can and must guarantee they will hold milk prices at least till Spring 2018
During 2017, co-ops paid sizeable milk price increases, and they had undoubtedly supported milk prices during 2016. However, until the last couple of months, they have mostly undershot the net EU returns (gross returns minus a 5c/l notional processing cost) in the average milk price paid to farmers as measured monthly by the Farmers’ Journal Milk League.
It is clear that sizeable additional milk volumes and strong export performances at higher prices have helped co-ops rebuild their balance sheets in 2017. And while average and spot prices are easing, contracts signed over the last number of months were at higher prices, which are still benefiting co-ops.
Irish farmgate milk prices increased by 52%, or 12 cents per litre, in the last 15 months, but this was after over two years of falling prices, of which 20 months below 30c/l. Farmers were 11 months, from October 15 to August 16 with prices below 25c/l. 2017 was a good year for milk producers, but their increased turnover has served to catch up with cash flow shortages and other financial commitments. From May 2014 to July 2016, milk prices had fallen steadily by a total of 14.6c.
In this context, even allowing for the weaker outlook for 2018, it is crucial that co-ops would hold milk prices at the very least until next spring as they can afford to.
It would also be important for co-op boards to examine the co-op’s financial situation in detail, and seriously consider the option of end of year bonuses for their fellow-suppliers.
[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).