INGREDIENT SOLUTIONS MARKET REPORT – Q3, 2013
The year to date has been challenging to say the least, with winter extending to summer and spring just not happening at all. This coming on top of a very poor summer last year has all added up to a double whammy of higher input costs and lower yields for the farmers. Prices in April hit an all-time high in many places. As we move into summer we are seeing signs of a slight improvement with prices easing slightly. Unfortunately this can only be attributed to the peak of the season being in early summer. Disappointingly there is no sign of these recent drastically high prices disappearing any time soon however much we’d like them to.
Prices in dairy products have been on an upward trend since January with SMP, butter and cream being the strongest and cheese is now catching up fast. The reason for this is very simple; most of the cheese that was being sold in the first two quarters was made with milk that was 5 cent a litre lower than where the milk price is today. The average milk price across Europe is 34.2 cent a litre, which is 6% higher than this time last year, itself a record year for prices. This upward pressure on prices is a serious concern for everybody involved in the dairy industry making it a real struggle for farmers to cope in this climate. Large dairies have been under pressure to increase their milk prices to help and most dairies have duly obliged with this to try and keep their farmers happy. The Dairy Crest Davidstow price is now at a record high of 31.77ppl and is the highest cheese-milk contract in the UK. Many farmers elsewhere still remain unhappy though as they look at the movement of the market and face up to the stark reality of trying to pay the bills and keep their heads above water.
Milk production growth in key export regions is expected to continue to fall through the first half of 2013. If the USA is any guide volatility will, if anything, accelerate; although it wasn’t a record breaking year, 2012 dairy prices certainty saw their fair share of high and low prices. Class III milk price started the year at $17.05 dropping down to $15.23 in May. Similarly, the Class IV price started the year at $16.56 sinking to $13.24 in June. Low milk prices would hurt dairy producers in any year, but in a year with a devastating drought wreaking havoc on the country, these low prices threaten the very survival of many dairies across the USA.
Milk production fell in line with prices and for many producers this last price decline was the straw that saw many dairies selling out completely. This trend looks like being mirrored throughout Europe.
The farmers are going to have to deal with higher input costs due to the increase in feed prices because of the poor weather of last year. This will be exacerbated with y.o.y increases in fertiliser and energy costs.
Butter prices are €4200 and there is very little stock with most of the Dairies in Ireland sold forward to the end of the year. French butter is €4400, Polish is around the €4050 mark, with German and Dutch more or less in line with Irish. It seems that butter will take no time in becoming a more valuable commodity than gold if prices continue in the same direction as the last 12 months. Many bakeries in the UK have reported being especially hard hit by these steep record prices. Most are very reliant on the butter market as they produce items like all-butter croissants and are finding it challenging to accommodate these increases in their own costs. To show the scale of the price increases in the UK, butter was at £2,950pmt in March and this had jumped up to £3,500pmt in April. This is a phenomenal 59.1% increase in price from this time last year. The wholesale cost of butter in the space of a month jumped up from £2,400pmt to £3,600pmt. We will have to wait to see if the industry can sustain this pressure if this continues much longer. SMP prices are steady at the €3200 mark and hopefully we won’t see anything too drastic with these prices as Russian demand is strong and is driving a lot of the demand in Europe despite their current trade dispute with the dominant EU powerhouse Germany.
Mild Cheddar prices have moved up sharply in Q2 from £2750 pmt to £3200pmt and are still on the upward trend. Cheese traders say the price should be between £3250 to £3300pmt and if you want a price out to the end of the year they are quoting £3500 for coloured Mild which is fast becoming a collector’s item. It’s not the price that’s important but supply. Scottish coloured cheddar is so precious that it is not even in conventional storage, it is being kept in vaults. It’s yet another indication of how crazy things have got in the industry and it also gives a small insight into the thinking of producers. It indicates they do not see someone coming along any time soon with a magic wand and fixing all of our problems as they are remaining very cautious. They have obviously every right to be cautious as it would be very unrealistic to think there will be any imminent easing off of prices. Supply is so tight at the moment and we are already past the peak time in the production season which is normally early in June. As an example of the year so far UK production is already 4.7% down on last year with May collection down 22.9m litres from the same time last year. Peak milk came on 4th June with 40.7m litres being produced but this is believed to be the latest peak day ever recorded! With worldwide demand increasing there is only one natural direction prices are heading if production continues to falter below past levels. We need production levels to increase significantly every year to keep up with demand and the current decreases we are seeing are simply nothing short of disastrous in this sense.
Throughout the EU 27 whilst cheese production has increased in the last month in most areas and is expected to continue to do so, local consumption and exports have outpaced that growth. The margin of safety has dropped from 10,000mt positive, to 5,000mt negative last year with barely break even being attained this year. So cheese supply and demand are definitely out of balance.
THE YEAR AHEAD
Going forward prices look like staying firm through to the start of Q2 in 2014, although some supermarkets optimistically think prices will fall back in Q4 of 2013. Let’s get back to reality; the fact is milk production is down by over 4% in the EU and the price per litre is up over 6% per litre. Firm or rising prices are more or less a foregone conclusion no matter how optimistic we can try to be! There is obviously optimism that the prices might not rise to the record levels that were hit in April but anyone hoping for a market crash and everything to be rosy in the garden again are going to be disappointed. The low stock situation everywhere worldwide apart from the US, who has a high storage quantity, will prevent any great price collapse. Many are expecting Q1 of 2014 to bring a stronger supply response and a large increase in export product availability. Whilst there is some reason for believing this there is no realistic prospect of glut conditions appearing anytime soon. Relief from the extreme shortages we are currently witnessing is not on the horizon.
The relationship with your dairy supplier in the next six months is going to be crucial as I can see buyers being let down or not getting stock, just as in late 2007 and early 2008. Ingredient Solutions did not let any of our customers down then and we will not this time round either.
I would like to thank you all for your continued loyal support and assure you of ours.