Dairy Market Quarter 3 Report
The 2nd quarter of 2015 was fundamental for the dairy industry as the EU quotas on dairy supply were finally lifted in April. As a result huge opportunities have been opened up for European nations who felt they were not fully able to maximise their potential. For years strong dairy producing countries were forced to throw away milk as a result of exceeding their annual quotas. Now that these restrictions have been lifted they no longer have to fear being fined and capacity will naturally increase. This is the moment many dairies have been waiting for years to capitalise on and it will be illuminating to see the influence it will have on the global market.
There was a degree of volatility in terms of pricing before the quotas were officially lifted in April. Many countries in the EU for example enjoyed very strong production seasons last year. As a result they exceeded their quotas earlier than expected. This meant any processor who produced excess milk would be fined. This led to a short term supply scarcity due to processors being unable to put their milk into production because of the inevitable fines. As a result prices increased across the board. White Mild Cheddar rose by £100 in Q1 and increases were seen across the industry for most commodities as there were 6 consecutive price rises at Fonterra’s GDT auctions.
Despite the slight increases witnessed in the Spring, prices have stabilised again with drops seen for dairy products in early May. Many observers expect further downward pressure to be put on prices for the rest of the year so there is great concern at the moment among farmers. If the removal of quotas causes further weakening of prices due to the inevitable extra supply, many farmers feel the milk price will reach an unsustainable level. Despite these worries the processors will also have to bear in mind they will need to have a competitive milk price to take advantage of the quota situation so this could alleviate any fears farmers have. Again it is crystal ball stuff at the moment so it will be very interesting to see how this one plays out.
Early examples of the effects the removal of quotas will have on the market has already been witnessed, not just in Europe but the whole global market. Average EU butter prices dropped by 7%, with a very significant 16% drop witnessed in New Zealand. SMP prices fell in France and Belgium by 8% and 9% respectively but remained stable in Europe as a whole. WMP prices also fell in Europe by 3% which is following the trend established since China reduced imports in early 2014. Many observers expect further falls in price but are also advising it could very well reach the bottom soon too.
To summarise we at Ingredient Solutions are optimistic that our customers should benefit from favourable pricing in the wake of the removal of milk quotas. There are of course no guarantees, but the natural expectation is that the increase of supply should gradually ease prices down. However we also must be aware that the re-emergence of Russia back into the market would completely change the market dynamic. It is unlikely to happen this year but it is not beyond the realm of possibilities. If a large consumer of dairy such as Russia were to start buying EU dairy products again naturally prices would push upwards. Russia heavily rely on dairy imports as they are not self-sufficient so many observers are watching their every move keenly.
While we at Ingredient Solutions consider ourselves as dairy industry experts, we also keep abreast of trends in other food and related commodity markets which we believe to be relevant to our customers businesses. For example whilst droughts have a serious effect on dairy products they have significant implications in other areas too. Almonds are a case in point where the current drought in California, the main global producing region, has resulted in an 8% uplift in prices in the US with similar trends seen in Europe. Total rainfall and its distribution also have an important role in food products in general. For example Favourable weather conditions have resulted in improved yields of pepper crops in Karnataka and Kerala, the main Indian pepper growing regions, resulting in a price drop of 20% over the past twelve months. Our sales team will be happy to discuss matters relating to food ingredients when you next meet with them.
No matter what happens in the market, you can rest assured that we at Ingredient Solutions will be keeping on top of any market developments. We are renowned for our dedicated customer service and you can have no doubt you will be the first to learn what direction the market will be heading in the coming months. Most of our cheese prices have reduced for Q3 and we are glad to be able to share the benefits with our customers by passing on the price changes from July 1st.
We will remain optimistic as always and hope for further good news at the end of the summer as we look towards Q4. Again I would like to thank you all for your continued support and I wish a very prosperous summer to you all.