After a year of exceptionally strong milk supply in all key exporting nations, dairy product supplies have now moved into a marked surplus. In response, price has collapsed across virtually all products.
Joe Collins, managing director of the Irish Dairy Board’s Ingredients and Trading division, explained that some product buyers are taking a risk by sitting back awaiting further price falls.
“A serious weather or other shock that curbs supply will be required to change market sentiment,” he said, adding, “sentiment can change rapidly”.
It is useful to examine precisely where we are in the global dairy market cycle. Figure 1 shows the recent evolution of dairy product prices using the Irish Dairy Board’s Purchase Price Index (PPI).
The PPI is an index based on the average returns for dairy products sold by the IDB. The base of 100 is the average product returns for 2010. The graph also includes the Global Dairy Trade (GDT) index, which is the online auction of dairy products run by New Zealand’s Fonterra.
While global demand for dairy products expanded at a healthy pace in 2013, Joe Collins said that high prices resulted in “demand burn-off” in emerging markets for much of 2014. “Excessive growth in supply in response to the same high prices also contributed to the current market weakness,” he added. Despite still being constrained by milk quotas, Europe has actually led milk output growth (Figure 2).
For the January to October period, EU milk output grew by 5.1% on the previous year. That is 6bn extra litres of milk. To put this in context, Europe’s extra milk production in the first 10 months of the year is more than the full year output of the Republic of Ireland. High milk prices, lower input costs, favourable weather and herds in expansion mode combined to create a powerful cocktail.
Collins explained that domestic consumption of dairy products in Europe will expand by about 1% this year, meaning 80% of the extra milk or almost 5bn litres seeking new markets. That would have been a challenge in normal times, but it became a much bigger issue on 7 August when Russia dramatically announced a ban on EU dairy imports. The largest global import market for European cheese and butter vanished overnight.
Demand
Amidst all the negativity, it is important to stress that global demand for dairy products continues to grow at a healthy pace of around 2%. At present, it is being stifled by the last of high-price stock in the supply chain and buying sentiment – the relaxed attitude of buyers in a market where they anticipate further price falls.
As well as reading monthly updates on milk supply growth in every dairy producing nation, buyers are aware that demand is constrained by factors including:
The Russian ban on dairy imports from the EU.China, with high volumes of high-priced stocks.Emerging market and general economic slowdown.Ebola fears reducing growth in west Africa.Low oil price damaging buying power from oil nations.A further complication on the supply-demand balance equation is that low concentrate feed costs could boost dairy output into 2015. Joe Collins also believes that the drop in EU milk prices has “come too late” to the farmgate to constrain early 2015 milk supply. However, for the first three months of the year, milk quota concerns and expected sharp milk price falls will act as a brake on output in many countries.
Milk output growth in New Zealand, the world’s largest dairy exporter, is a key factor determining market sentiment. Despite a forecast price of 20.75c/litre in Irish equivalent for the current 2014/2015 season, NZ milk solids output in October was 6% up on the previous year. It is likely that farmers will curtail spending – Fonterra last week cut its output forecast from 2% to zero, with expectations that farmers will dry off cows early and reduce concentrate usage.
This is the first real sign globally of farmers responding to low prices. As yet, it remains just a forecast; monthly delivery numbers in line with the prediction, or a further revision downwards, would boost market sentiment.
A southern hemisphere El Niño weather event, which remains possible, would result in dairy herds being dried off. If such a supply downturn coincided with a return of Chinese buyers to the markets, price recovery could be clearly envisaged.
New Zealand’s main processor, Fonterra, is heavily reliant on one product, whole milk powder (WMP), to a single market, China. The WMP price at the Global Dairy Trade auction has collapsed by 50% in the past six months to just 17c/litre.
At 16% of global trade, China is the largest single importer of dairy products. Chinese import demand grew in 2014, but the pace of growth in the second half was significantly slower than previous years. This requires some context. According to the Dutch Dairy Board, China’s imports of dairy products (expressed in liquid milk equivalent) have soared from 2bn litres as recently as 2008 to almost 9bn litres in 2013.
Imports
Rabobank China analyst Sandy Chen told the recent Irish trade mission to China that powder imports in the first eight months of 2014 were 61% ahead of last year. The second half slowdown was due to excess stocks after the first-half buying binge, a recovery in 2014 domestic output (equivalent to 2.2bn litres of milk), weaker economic growth and some demand burn-off due to the high dairy prices.
China is expected have economic growth of around 7% for 2014 – still healthy but its lowest pace of economic expansion since 1990.
Collins suggested that the high prices for powder in the first half of the year may also have damaged the supply structures in China – customers in the supply chain who bought whole milk powder forward at prices of $5,000/t may have gone bust when competing six months later with product available for half that price.
Government and global investor-supported investment in massive dairy units in China has contributed to the recovery in domestic milk output, albeit at high cost (40-50c/litre). It remains to be seen if this milk output and that in other emerging high-cost producing regions will continue to grow when global dairy products are available for half the price.
Given that the slowdown in China’s purchasing coincided with the supply growth highlighted above, it is not surprising the GDT price index collapsed by 41% in the six months from March to September.
The US, with 9m high-yielding dairy cows, has become a giant on the global dairy market. While US milk prices are falling from record highs, the country’s department of agriculture (USDA) has forecast milk output growth of 3% in 2015 (2014: 2.4%) on the back of strong margins and good domestic demand. Low feed costs, margin protection insurance and healthy balance sheets are all set to support US dairy output growth in 2015.
The price of crude oil has fallen by 45% since June. This is likely to reduce demand for dairy products, especially powders, from government programmes in oil-producing nations. However, for European and US consumers, an oil price fall could translate into higher consumer spending on dairy products, especially cheese and butter.
Currency exchange rates are another unpredictable variable that can impact on farmgate prices. Recent strengthening of the dollar has made US dairy exports less competitive, while here in the EU we have benefitted from a significantly weaker euro.
Factors that could change buyer sentiment include an increase in the EU’s intervention prices, increased culling, a weather event in a major producing nation or a surprise re-opening of the Russian market for dairy produce from Europe. Once they reach the consumer, lower prices should boost dairy product consumption.
While the Global Dairy Trade auction price has been falling since April, farmers across the world are only now receiving the painful signal that markets have too much milk. Without an unforeseen event, the pace of the recovery will be dictated by the speed of supply contraction.
Predicting the farmer response globally is complicated by the abolition of EU milk quotas from 1 April, as well as low feed and oil prices. We should not forget that in 2009, Dutch farmers expanded rather than cut milk output in response to low milk prices. The attitude of banks to heavily indebted farmers and processors globally is also a difficult-to-determine variable.
Forecasts issued this week by the USDA estimate that milk output growth in the five main exporters will decline to 1.4% next year, from 3.9% in 2014.
It predicts that New Zealand’s milk output growth will drop to 1.8% next year from 7.4% in calendar year 2014. In the first year of milk quota removal, its forecast that output growth in the European Union will retreat to 0.2% in 2015 from 4.7% this year looks optimistic.
Positive
Collins stressed that the medium- and long-term outlook remains positive on the back of:
Population growth.Increased consumer affluence and a growing middle class in developing markets.Urbanisation – more and more people are moving from rural areas into the cities.The westernisation of diets – nations who in the past would not have eaten dairy products are now including dairy in their diet.An increased focus on nutrition and natural food, including butter and cheese, especially in the USA and EU.“The next few months will be difficult, until the supply-demand balance is restored,” Joe Collins said. Irish farmers can only hope that it is a short, sharp downturn with prices bouncing back in time to deliver a reasonable milk price average for 2015.
PPI forecast of 90 for 2015
As shown in Figure 1, the Purchase Price Index (PPI) has fallen 24% this year and is forecast to hit 97 for December. The base of 100 is the average returns for product in 2010.
The Irish Dairy Board (IDB) is currently forecasting an average Purchase Price Index (PPI) for 2015 of 90, starting at 86 in January. A base of 100 equates to gross returns of 34.8c/litre. If a processing cost of 6c/litre is assumed, a PPI of 90 points to an average farmgate price of 25.3c/litre next year (26.6 c/l including VAT).
However, it must be noted that forecasting is notoriously difficult and is usually overtaken by events. The dairy market evolution of the past three years is proof of this. Three major events, all unforeseen, that had a significant impact on dairy product prices are highlighted on the PPI graphic above – the New Zealand drought, the Chinese foot-and-mouth disease outbreak and the Russian ban on EU food imports.
Farmers will also expect their processor to protect them from the worst extremes of the market next year, in the same way that farmgate prices did not hit 40c/litre this year when the PPI would have suggested that such a base price was achievable.
After a year of exceptionally strong milk supply in all key exporting nations, dairy product supplies have now moved into a marked surplus. In response, price has collapsed across virtually all products.
Joe Collins, managing director of the Irish Dairy Board’s Ingredients and Trading division, explained that some product buyers are taking a risk by sitting back awaiting further price falls.
“A serious weather or other shock that curbs supply will be required to change market sentiment,” he said, adding, “sentiment can change rapidly”.
It is useful to examine precisely where we are in the global dairy market cycle. Figure 1 shows the recent evolution of dairy product prices using the Irish Dairy Board’s Purchase Price Index (PPI).
The PPI is an index based on the average returns for dairy products sold by the IDB. The base of 100 is the average product returns for 2010. The graph also includes the Global Dairy Trade (GDT) index, which is the online auction of dairy products run by New Zealand’s Fonterra.
While global demand for dairy products expanded at a healthy pace in 2013, Joe Collins said that high prices resulted in “demand burn-off” in emerging markets for much of 2014. “Excessive growth in supply in response to the same high prices also contributed to the current market weakness,” he added. Despite still being constrained by milk quotas, Europe has actually led milk output growth (Figure 2).
For the January to October period, EU milk output grew by 5.1% on the previous year. That is 6bn extra litres of milk. To put this in context, Europe’s extra milk production in the first 10 months of the year is more than the full year output of the Republic of Ireland. High milk prices, lower input costs, favourable weather and herds in expansion mode combined to create a powerful cocktail.
Collins explained that domestic consumption of dairy products in Europe will expand by about 1% this year, meaning 80% of the extra milk or almost 5bn litres seeking new markets. That would have been a challenge in normal times, but it became a much bigger issue on 7 August when Russia dramatically announced a ban on EU dairy imports. The largest global import market for European cheese and butter vanished overnight.
Demand
Amidst all the negativity, it is important to stress that global demand for dairy products continues to grow at a healthy pace of around 2%. At present, it is being stifled by the last of high-price stock in the supply chain and buying sentiment – the relaxed attitude of buyers in a market where they anticipate further price falls.
As well as reading monthly updates on milk supply growth in every dairy producing nation, buyers are aware that demand is constrained by factors including:
The Russian ban on dairy imports from the EU.China, with high volumes of high-priced stocks.Emerging market and general economic slowdown.Ebola fears reducing growth in west Africa.Low oil price damaging buying power from oil nations.A further complication on the supply-demand balance equation is that low concentrate feed costs could boost dairy output into 2015. Joe Collins also believes that the drop in EU milk prices has “come too late” to the farmgate to constrain early 2015 milk supply. However, for the first three months of the year, milk quota concerns and expected sharp milk price falls will act as a brake on output in many countries.
Milk output growth in New Zealand, the world’s largest dairy exporter, is a key factor determining market sentiment. Despite a forecast price of 20.75c/litre in Irish equivalent for the current 2014/2015 season, NZ milk solids output in October was 6% up on the previous year. It is likely that farmers will curtail spending – Fonterra last week cut its output forecast from 2% to zero, with expectations that farmers will dry off cows early and reduce concentrate usage.
This is the first real sign globally of farmers responding to low prices. As yet, it remains just a forecast; monthly delivery numbers in line with the prediction, or a further revision downwards, would boost market sentiment.
A southern hemisphere El Niño weather event, which remains possible, would result in dairy herds being dried off. If such a supply downturn coincided with a return of Chinese buyers to the markets, price recovery could be clearly envisaged.
New Zealand’s main processor, Fonterra, is heavily reliant on one product, whole milk powder (WMP), to a single market, China. The WMP price at the Global Dairy Trade auction has collapsed by 50% in the past six months to just 17c/litre.
At 16% of global trade, China is the largest single importer of dairy products. Chinese import demand grew in 2014, but the pace of growth in the second half was significantly slower than previous years. This requires some context. According to the Dutch Dairy Board, China’s imports of dairy products (expressed in liquid milk equivalent) have soared from 2bn litres as recently as 2008 to almost 9bn litres in 2013.
Imports
Rabobank China analyst Sandy Chen told the recent Irish trade mission to China that powder imports in the first eight months of 2014 were 61% ahead of last year. The second half slowdown was due to excess stocks after the first-half buying binge, a recovery in 2014 domestic output (equivalent to 2.2bn litres of milk), weaker economic growth and some demand burn-off due to the high dairy prices.
China is expected have economic growth of around 7% for 2014 – still healthy but its lowest pace of economic expansion since 1990.
Collins suggested that the high prices for powder in the first half of the year may also have damaged the supply structures in China – customers in the supply chain who bought whole milk powder forward at prices of $5,000/t may have gone bust when competing six months later with product available for half that price.
Government and global investor-supported investment in massive dairy units in China has contributed to the recovery in domestic milk output, albeit at high cost (40-50c/litre). It remains to be seen if this milk output and that in other emerging high-cost producing regions will continue to grow when global dairy products are available for half the price.
Given that the slowdown in China’s purchasing coincided with the supply growth highlighted above, it is not surprising the GDT price index collapsed by 41% in the six months from March to September.
The US, with 9m high-yielding dairy cows, has become a giant on the global dairy market. While US milk prices are falling from record highs, the country’s department of agriculture (USDA) has forecast milk output growth of 3% in 2015 (2014: 2.4%) on the back of strong margins and good domestic demand. Low feed costs, margin protection insurance and healthy balance sheets are all set to support US dairy output growth in 2015.
The price of crude oil has fallen by 45% since June. This is likely to reduce demand for dairy products, especially powders, from government programmes in oil-producing nations. However, for European and US consumers, an oil price fall could translate into higher consumer spending on dairy products, especially cheese and butter.
Currency exchange rates are another unpredictable variable that can impact on farmgate prices. Recent strengthening of the dollar has made US dairy exports less competitive, while here in the EU we have benefitted from a significantly weaker euro.
Factors that could change buyer sentiment include an increase in the EU’s intervention prices, increased culling, a weather event in a major producing nation or a surprise re-opening of the Russian market for dairy produce from Europe. Once they reach the consumer, lower prices should boost dairy product consumption.
While the Global Dairy Trade auction price has been falling since April, farmers across the world are only now receiving the painful signal that markets have too much milk. Without an unforeseen event, the pace of the recovery will be dictated by the speed of supply contraction.
Predicting the farmer response globally is complicated by the abolition of EU milk quotas from 1 April, as well as low feed and oil prices. We should not forget that in 2009, Dutch farmers expanded rather than cut milk output in response to low milk prices. The attitude of banks to heavily indebted farmers and processors globally is also a difficult-to-determine variable.
Forecasts issued this week by the USDA estimate that milk output growth in the five main exporters will decline to 1.4% next year, from 3.9% in 2014.
It predicts that New Zealand’s milk output growth will drop to 1.8% next year from 7.4% in calendar year 2014. In the first year of milk quota removal, its forecast that output growth in the European Union will retreat to 0.2% in 2015 from 4.7% this year looks optimistic.
Positive
Collins stressed that the medium- and long-term outlook remains positive on the back of:
Population growth.Increased consumer affluence and a growing middle class in developing markets.Urbanisation – more and more people are moving from rural areas into the cities.The westernisation of diets – nations who in the past would not have eaten dairy products are now including dairy in their diet.An increased focus on nutrition and natural food, including butter and cheese, especially in the USA and EU.“The next few months will be difficult, until the supply-demand balance is restored,” Joe Collins said. Irish farmers can only hope that it is a short, sharp downturn with prices bouncing back in time to deliver a reasonable milk price average for 2015.
PPI forecast of 90 for 2015
As shown in Figure 1, the Purchase Price Index (PPI) has fallen 24% this year and is forecast to hit 97 for December. The base of 100 is the average returns for product in 2010.
The Irish Dairy Board (IDB) is currently forecasting an average Purchase Price Index (PPI) for 2015 of 90, starting at 86 in January. A base of 100 equates to gross returns of 34.8c/litre. If a processing cost of 6c/litre is assumed, a PPI of 90 points to an average farmgate price of 25.3c/litre next year (26.6 c/l including VAT).
However, it must be noted that forecasting is notoriously difficult and is usually overtaken by events. The dairy market evolution of the past three years is proof of this. Three major events, all unforeseen, that had a significant impact on dairy product prices are highlighted on the PPI graphic above – the New Zealand drought, the Chinese foot-and-mouth disease outbreak and the Russian ban on EU food imports.
Farmers will also expect their processor to protect them from the worst extremes of the market next year, in the same way that farmgate prices did not hit 40c/litre this year when the PPI would have suggested that such a base price was achievable.
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