Latest Dairy Market Blog

IFA analysis of the current dairy market trends and developments and how they affect Irish farmers.

February 17, 2018

[vc_row][vc_column][vc_column_text]Milk output growth slower at end 17, but ahead of demand growth

While milk output growth moderated a little in December, this reflected lower NZ supplies (-2.6%), and slightly more modest growth than expected in the US (+1.1%).  EU output was well up for the month, with the full year production up 1.9%, and the two largest producers, Germany and France growing 3-5% in the last few months of the year.

Ireland (+9.2%), the UK (+3.3%), Poland (+4.9%), Spain, Denmark and Italy were all well up for the year.  Only Germany, France and the Netherlands (the latter due to the phosphates related herd reduction) had quasi unchanged volumes across the year.

(Note, the graphic to the right represents the Jan-Nov period, the figures above the Jan-Dec period.)

The balance of supply to demand will be heavily dependent on what happens with the European flush – and so far it is set for a significant increase.  Together with the overhanging SMP stock, most market analysts expect this to lead to lower prices.[/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]Intervention stock – some thoughts on how to dispose of it

The Council of Agriculture Minister has rubberstamped earlier this month the decision by the EU Commission to remove the fixed price from any potential intervention buying in this year.  In practice, it means the Commission may, if it so chooses, not purchase any product into intervention when it opens in March, or to purchase it at a price below the €1698 reference price.

While one can understand it is problematic to be adding more stock to the existing 370,000t overhanging the market, the Commission really needs to get stuck into how to dispose of it.

Interesting proposals have been made by the French government – the most credible of which is to direct it to feed compounders for the manufacture of livestock feed other than calf milk replacer – replacing vegetable protein, perhaps.

It has been pointed out that the product has been available all along for feed compounders to buy it, and they have either not shown interest or only at very low prices.

Perhaps parcelling up different ages of stock for disposal at differentiated prices might appeal to them and release stock while making a clear difference between it and the fresh market, which must not be disrupted.

The EU Commission will be debating a variety of methods for disposal next week, and the IFA Dairy Team will have the opportunity to make some proposals through COPA and the Citizen Dialogue Group which are also scheduled to discuss the issue early next week.

The ideal scenario would be to dispose of a sizeable chunk from intervention reasonably promptly in a manner which does not have a negative impact on the price of the very different fresh product the production of which is rising with the seasonality of milk production.

Demand is a mixed picture

EU butter and powder demand is reported to be flat.  Cheese consumption is continuing to grow moderately, and liquid milk consumption is in decline.

In the US, butter consumption continues historically high, with cheddar (an important ingredient in fast food such as pizza) and powder consumption weaker.

Demand remains very strong in China in particular, where the strong growth of imports seen in 2017 continues in to the new year, especially for powder.  Japanese cheese imports are also growing – from a low base.  As to Korea, the positive impact of the Olympic Games seems to have waned somewhat with some weakness showing in import activity.

In the rest of South East Asia (Vietnam, Indonesia, Philippines…), powder demand appears to be recovering, with butter and cheese growing from a low base.

In the Middle East and North Africa, Algeria, Libya and Iraq have increased imports, especially from the EU, but volumes to most of the other countries is down.  That said, butter exporters report that buyers are starting to find the lower prices more attractive.

In South America Mexico and Chile imports are increasing, especially in the latter case imports of cheese from Europe.  Venezuela’s economic woes have cost powder imports, and Brazil dairy imports have weakened.

EU Commodity prices stabilising at lower levels than for most of 2017

It is good to see that the significant fall in prices seen from October onwards for most commodities (since July for SMP) have apparently stabilised, at least for now.  A run of 3 positive GDT auctions this year so far, influenced by lower NZ milk output, have undoubtedly influenced this.  The next auction is on next Tuesday 20th February, and it will be very interesting to see what this brings.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Based on data from EU MMO[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Prices as reported by the EU MMO for week ending 4th February (the most recent data available) would return as per table below a gross 33.44c/l before processing costs.  Assuming those are around 5c/l, this would be equivalent to a farmgate price of 28.44c/l + VAT or 30c/l incl VAT.

Based on EU MMO data

The Ornua PPI provides some degree of hedging on the way down from the real time market trends, as it reflects the returns from forward contracts signed some months ago at somewhat higher prices – though those are bound to be running out – and the value added by brands, not least Kerrygold.

The Ornua PPI for January remains at the December level because of this, at 111.3 points, equivalent to a VAT inclusive farmgate price, according to Ornua themselves, of 33.6c/l (31.87c/l + VAT).[/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]Co-ops have scope to continue to hold prices

Decisions by co-ops to hold their January milk price shows that they have the comfort to hold milk prices when volumes are low, and bearing in mind that they did not pass back the full benefits of the strong 2017 buoyancy for most products.

February supplies typically account for 3.7% –  slightly more than the January 2%, but still very modest amounts.  Holding the price for February milk is not an unreasonable or unrealistic ask, despite lower returns.

Farmers have had a tough early spring, calving and trying to spread slurry in the most wintry and difficult conditions in recent years.  In addition, they will have extra costs on slurry management this year, arising from the new conditionalities of the renewed Nitrates Derogation.

It is essential that co-ops would work hard to show farmers how they are going to optimise market returns in their best interest, in a year in which production challenges on farms will at least match challenges on the market place.


CL/IFA/16th February 2018[/vc_column_text][/vc_column][/vc_row]

January 26, 2018

[vc_row][vc_column][vc_column_text]While supplies are booming, demand remains strong

In a report this week, the British AHDB pointed out that, while November milk deliveries from the five main producing regions were up almost 4% by comparison with last year, an annual comparison shows a more modest increase of 3.5 billion litres or 1.2%.

With the UN FAO estimating that demand is continuing to grow by between 1.7% and 2.1%, AHDB stress that the annual increase in milk production should not create a major imbalance in global markets in 2018.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: AHDB Dairy (UK)[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk supplies are rising, especially EU output – however, the comparisons are somewhat distorted by the reduced deliveries in the last quarter of 2016.

The Netherlands – whose herd reduction limited 2017 production somewhat –  was the only dynamic EU dairy country to register a decrease.  Milk collection were down 0.26% in December, and the annual production was back 0.2%.

December supplies in Germany are estimated by FCStone International to be up 5.2% (after a 6.4% increase for November), while French output is believed to be up 2.6% up for December (5.4% up for November).

December 17 UK production is estimated at 3.5% up on December 2016.

Winter Olympic games boost already fast rising Korean dairy demand

Korea’s Winter Olympic Games  from 9th to 25th February will boost demand for dairy products with an influx of visitors.  Already in 2017, dairy imports for the January to November 2017 period have increased by over 20% to just over 254,000t.

The most significant increases were in cheese (up 17%), whey powder (up 12%) and SMP (up 24%).  The top three sources of those imports were the US (over 71,000t of products, a 32% increase year on year), the Netherlands (31,500t up 26%) and New Zealand with just under 27,800t.

Fresh cheese imports increased 16% to 77,800 tonnes, while hard and semi-hard cheeses, which are gaining in popularity, went up by 22%, led by cheddar (an interesting fact, in light of the potential implications of Brexit for our own cheddar marketing).

Commentators from Agra Informa add: “The Olympics may spur a fitness kick among health-conscious Koreans, and if so whey powders aimed at this market is a trend to watch.”  The graph below shows that they imported 63,500t of the stuff already last year![/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: IEG Vue – Dairy Markets[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Strong growth in exports to continue, predicts EU Commission

The EU Commission estimates that 776,000t of SMP were exported out of the EU in 2017, up 35% on 2016 – so an awful lot of powder went out to commercial markets, not into intervention, in 2017!  For 2018, they expect a further 6% increase in SMP exports.

2017 exports of butter were slightly down – we remember shortages caused prices to sky-rocket – and the EU Commission expects them to be a little lower again in 2018.

What they expect to see, is more cheese and WMP.  On whole milk powder, they expect a slight increase from 674,000t to 677,000t, while cheese exports, already up 6% in 2017 to 848,000t could lift to 907,000t, another 7%.

Two positive January GDT auctions reflect lower NZ output forecasts

New Zealand milk production for December 2017 was down 4.6% in milk solids, and 2.6% in volume.  Fonterra’s December collection were down 6%.  For the calendar year January to December 2017, national milk solids output was 1.76% up.   Reviewed forecasts of milk production by Fonterra for the 2017/18 season (July 17 to June 18) suggests it may fall by 3% relative to previous season.  Weather factors, especially moisture deficits in the North and South Island at and immediately after peak, explain the drop in output.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: DCANZ[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]The impact of the reduced output and the expectations of lower production for the whole season has been felt in the first two GDT auctions of 2018, which showed a weighted average price increase of respectively 2.2% and 4.9%.

This still leaves SMP prices at US$600/t less than it was last year, though butter has made a good recovery in the last two auctions.  Together, they would return a gross milk return equivalent of 31c/l before processing costs are deducted.[/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]Spot quotes stabilising 

It has been some time since we have last seen the FCStone International spot quote table coloured entirely in green (positive price trend) or blue (neutral price trend).

For the week of 24th January, spot butter prices in Germany, France and the Netherlands rose by around €48/t on average, with SMP up a modest €12, and whey powder also slightly up (see table below).

This follows two positive GDT auctions (see below), and the apparent stabilisation of EU average dairy product prices on the positive side (also below), and the sale of 1800t of SMP out of intervention for nearly €200 less than the average spot at the more negative end.

Could it be that market prices are stabilising somewhat, despite the intervention stock overhang?[/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]Average EU dairy prices reported for 21st January 2018 also appear to mark a beat after weeks of slow decreases.  There are little or no changes in the last two weeks for butter, cheddar, SMP and whey powder prices.  Whole milk powder prices have even lifted by a small €30/t.[/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]Gross returns have eased by around 7c/l gross since September last, so there is still a legitimate concern about dairy commodity and milk price trends for spring of 2018.  A representative product mix for Irish milk would have, if traded entirely on 21st January average product prices, yielded a gross return of 33 to 34c/l approximately before processing costs and VAT.  That would be a farm gate milk price of around 30.6c/l incl VAT.[/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]CL/IFA/26th January 2018[/vc_column_text][/vc_column][/vc_row]

December 21, 2017

[vc_row][vc_column][vc_column_text]Challenges ahead for 2018

Recovering EU milk supplies and stubbornly overhanging SMP stocks, will likely be the main factors influencing milk prices in 2018.  Thankfully, demand remains strong, with EU exports continuing to grow in recent months, and strong demand increases in China and the rest of South East Asia, and in South America.

So, as 2017 draws to a close, what will next year have in store for Irish dairy farmers?[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EU milk production growing strongly

The USDEC compilation of milk production for the top 4 regions in the globe up to October shows a return to strong growth, with the main 5 regions supplying an estimated 3.21% more milk, mostly caused by the recovery of EU milk output.[/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]EU production grew 4.43% in September, and a further 3.97% in October.  The main impetus for this growth is to be found in France and Germany, which until August had been in negative growth territory.

Germany lifted output by 3% in September, and a further 4.9% in October, though year todate Germany is still down 1.17% on last year.  France has experienced the same trend, after a negative first half.  September supplies were up 4%, and October’s 5%.  Supplies year todate are 1.15% down on the same period last year.

We should of course remember that, this time last year, both countries were among the strong users of the EU incentivised milk production reduction scheme, and still low (though rising) prices were not yet incentives to extra output.

Even the Netherlands, which earlier this year implemented a Nitrates Derogation-related herd reduction scheme which took out around 50-60,000 dairy cows from the national herd, have seen their output tip into positive territory in October, up 1.6%.  Year todate, Dutch milk production is marginally down, by 0.47%.

Clearly, the vast majority of EU member states with a reasonably significant dairy activity have seen a strong recovery starting over the autumn.[/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]In the US, production has been quite resilient throughout the year, at around 1.1% to 1.8-2% up most month on the same month in 2016.  For October, supplies were up 1.37%, and by a further 1% in November.

New Zealand output is also up, though the early spring was wet and depressed production, and weather continues to be challenging – this time with moisture deficit.  Supplies are up 2.7% for the month of October, and by 1.5% for the calendar year todate.

Australia also registered very strong growth in October, up 6.68%, and the trend is also to growth in recent months in South America (Argentina, Brazil and Uruguay).[/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]SMP intervention stock – 101,000t on offer in January

Tenders for the sale of SMP out of intervention stock started 12 months ago, and over that period, only 220 tonnes in total have been sold, over 15 tenders, out of just over 20,000t made available by the EU Commission – it being the SMP sold into intervention up to November 15.
The prices at which those tenders were adjudicated reflected the weakening market price, going from €2151/t 12 months ago to €1390/t in the tender of 21st November.  The most recent tender, on 12th December, saw no sales as the EU Commission chose not to accept the top price bid (€1300/t).  It should be noted that in the last two tenders, the lowest bids made were €800/t – someone taking the proverbial?
Tender number 16 is scheduled for 16th January, and this time the EU Commission is making available product sold in up to April 2016, a total of 101,000t.  Time will tell what impact this will have on the pricing expectations of buyers.

On the proposed buying-in method, an attempt at a “silent” (written) procedure failed earlier this month, so the topic is now up for discussion by the SAC or the Agriculture Council at some point in the New Year.  Our information is that the Commission’s proposal to not guarantee a fixed price from the very start of the buying in period appears to have strong support from member states, and will likely come to pass.  It would be crucial that this frankly regrettable move would be exceptional, and would not create a precedent for intervention buy in either before the end of the current CAP or into the new, post-2020 CAP.

The French have requested that the overall strategy around SMP intervention be debated by the Agriculture Council, most likely in late January.  This is vital, as it is important that the value of intervention in providing a safety net for milk prices would not be jettisoned in the rush to eliminate problematic stock![/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]Dairy prices easing

The nearly €7,000/t spike in 2017 butter prices could not last, and as milk output started to recover, so the butter prices started to fall.  They remain between €4,500 and €5,000/t (€5,160/t is the latest official EU average communicated by the EU MMO as we write), with spots suggesting further decreases.

Weak SMP prices, as well as increased availability of milk for processing, have also put pressure on other protein prices, with whey powder, whole milk powder and casein prices all sliding.

Returns from the representative Irish product mix have eased to a current (10/12/2017) 35.4c/l gross.[/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]The Ornua PPI has however duly reflected the delaying factor of forward contracts on the way down, and it is only for November that the index has eased – and at that only slightly compared to October.  The November milk price equivalent of the PPI was calculated by Ornua at 33.11c/l + VAT (34.9c/l incl VAT) – significantly better than average market returns reported by the EU MMO.[/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 GDT auction, which while concerning only a small minority of world dairy product trade is nonetheless hugely influential due to its public and immediate nature, has also shown general weakness in the price of all dairy products at global level in its most recent event (19th December).

The butter and SMP prices reached at the 19th December auction, allowing for the current US$ exchange rate, would return around 30c/l gross.[/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]Strong demand factors expected to hold

While supply side factors are causes for concern, there is a really positive upside on demand.

A return to strong economic growth

According to the EU Autumn Economic Forecast, for 2017: “The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%).
The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).

The European Commission expects growth to continue in both the euro area and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the euro area, 1.9% in the EU).”

At global economic level, Goldman Sachs Research economists Jan Hatzius and Jari Stehn say that “For the first time since 2010, the world economy is outperforming most predictions — a trend that will not only be continuing but amplifying in 2018.”  Their November global economic forecast predicts 4% global GDP growth for 2018.

Brexit aside, a return to strong economic growth in the EU and globally, and continuing falling unemployment are good news for consumer spend and consumption.

Recovering oil prices

Higher oil prices in recent months have had a positive impact on the purchasing power of many global food importers and dairy customers.

When prices were below US$50/barrel, the point was often made that prices in excess of US$60 would have a positive influence of global dairy purchases.[/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]Strong demand growth continues in China…. And elsewhere!

The infographic below is a neat summary of both supply and demand trends, courtesy of Fonterra.  It shows in particular very strong demand trends in China, Asia generally, and Latin America, with a more sluggish situation for the Middle East and Africa, which may improve into 2018 as a result of higher oil prices.[/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] Rabobank predictions for 2018

In its 2017 Quarter 4 Dairy Report, Rabobank points out that the growth of exportable surpluses of milk has affected market sentiment during Quarter 3, with uncertainty on EU policies (especially intervention) and geopolitical concerns (Brexit, Trump foreign/trade policies…) feeding into this.

Production trends in the EU over the first half of 2018 will be watched closely, Rabobank says, and they expect exportable surpluses to grow further – though the signals of lower milk prices and some attempts by processors to limit supply growth may mitigate this.

They confirm their views that the growth of exportable production is unlikely to overwhelm demand, which is growing strongly, and expect China to continue to feature strongly.

The following is their regional forecast:[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Source: Rabobank[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Milk prices easing in Europe, New Zealand and the US

Milk supplies are much less seasonal in Europe than they are in Ireland.  Our seasonality has historically protected farmers from winter/very early spring price cuts in the event of market downturns, because of the low volumes and relatively lower cost of holding prices.

Friesland Campina have reduced their December price 0.25c/kg to 41.50c/kg (this is for milk at 3.47% protein, 4.41% butterfat).

Milk prices have started to ease for some EU and international farmers: Fonterra have revised their forecast 2017/18 price from NZ$6.75/kg MS to 6.40/kg MS (note this does not include whatever dividend will be paid for the season).

In the US, prices have stabilised after some relatively modest growth in 2017, with an October price reported at US$17.90/lb.

We have shown in our recent analysis – see our December newsletter on this – that Irish co-ops have benefited considerably from improved markets in 2017, over and above what was passed back to farmers.

Co-ops should have sufficient comfort to hold prices well into spring, and to take a leaf out of the Carbery book, who have announced they will pay a 1c/l bonus on all 2017 supplies!

CL/IFA/21st December, 2017[/vc_column_text][/vc_column][/vc_row]


Quick Links