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As last year drew to a close, there were growing prospects of a relatively buoyant dairy market during the first half of 2020.
Behind this was an upward trend in commodity prices, especially for butter and milk powders, during the final months of trading last year.
However, after some further upward price momentum in January, this optimism has been replaced with uncertainty.
Since the start of February, commodity prices on global dairy markets have been in freefall due to the coronavirus outbreak.
While the impact has yet to be felt on farm gate prices, both processors and dairy farmers have expressed concerns over what is likely to happen to milk prices this spring.
Short-term contracts on products such as milk powder are yielding much lower returns compared to orders agreed in late 2019 and January of this year.
As a result, dairy processors in NI took a cautious approach when setting milk prices for February, with no changes applied across the board.
EU markets
The weekly Dutch Dairy Board (DDB) auction is a solid indicator of the health of European dairy markets.
At last week’s auction, there was some respite for butter and whole milk powder (WMP) prices, which were unchanged. However, skim milk powder (SMP) fell by €40/t.
The average price of butter over March is at €3,423/t, down from €3,540 and €3,565/t over February and January respectively.
This puts current butter prices on a par with those paid during July of last year. In March 2019, DDB butter was at €4,078 and in March 2018, the price stood at €4,790/t.
While there are other factors that influence farm gate prices, ultimately it was higher returns from butter sales that drove their recovery from the lows seen in 2016.
Milk powder
Moving to milk powder, the trends in prices over the last two months are similar.
SMP has fallen over the last six weeks from €2,640/t to €2,230/t last week. Across the month of March, skim prices have averaged €2,353/t.
However, unlike butter prices, which are down year-on-year, SMP is still running ahead of the last two years.
Back in March 2019, the monthly price averaged €1,955/t, while 12 months prior to this, SMP averaged €1,298/t.
WMP has been less volatile, but nonetheless there have been some price swings. Prices last week stood at €2,960/t, down from €3,100 in early February and €3,190/t at the start of the year. In the same month last year, WMP stood at €3,018.
GDT
The other leading barometer of the state of global dairy markets is the New Zealand GDT auction, which is held twice monthly.
Despite recording two positive auctions in January, there has been little good news to report at more recent trading events.
Last week’s auction saw a negative result being recorded for the fourth time in a row. Over these four auctions, the index price has fallen from US $3,226/t to $2,980/t, which puts the index price on a par with levels last recorded in late December 2018.
Butter and cheddar
Butter prices have eased from $4,250/t at the end of January to $4,144/t last week, although in the same time period, cheddar prices have strengthened from $4,048 to $4,398/t last week.
Just 12 months ago, GDT prices for butter were on the rise at $4,480/t, while cheddar was typically around $3,900/t.
Skim collapses
However, similar to European markets, milk powder prices have slumped in recent weeks. SMP has fallen from $3,036/t in late January to $2,527 last week, with WMP falling from $3,233 to $2,797/t over the same period.
But while SMP prices are in freefall, unlike WMP, they are still running ahead of the same period last year, when GDT markets were returning $2,115/t.
Driving the downward trend at the GDT has been the absence of demand from China, the world’s largest importer of dairy products.
With the Chinese government imposing movement and trade restrictions to curtail the spread of coronavirus, the knock-on effect has been lower prices in commodity markets around the world. In the last few days, there are some signs of a recovery in supply chains to China, however the impact of the virus will continue to be felt for a number of months.
Positives
While commodity markets have weakened, there are positives for NI dairy farmers, mainly because of the weakness of sterling against other major currencies.
The latest Milk Price Indicator (MPI) published by the UFU has increased by more than 1p/l to 29.86p/l, up from 28.8p/l on 6 March. It is the first time the MPI has recorded an increase since the end of January, at which point the price indicator stood at 29.95p/l.
Over the last week, sterling has dropped to around €1 = 93p, which is one of the lowest rates seen in the last 20 years. At the start of the month ,€1 was worth 87p and at the start of February 2020, the rate stood at €1 = 84p. In very simple terms, a 30c/l price in the Republic of Ireland was the equivalent of 25.2p/l in NI at the start of February, but it is 28p/l now.
Sterling hit a 35-year low against the US dollar last week, when it dipped below £1 = $1.14, although it has since recovered slightly to £1 = $1.17. At the start of March, £1 was worth $1.28, and at the start of February it stood at $1.32.
The movement in exchange rates potentially makes UK dairy exports much more attractive to possible international buyers. But that assumes that transport logistics and supply chains allow product to move.
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