Market report Q1 2013

The Story of Last Year

Weaker demand, wettest summer in recent history, first milk supply contraction in export regions since 2010.
A slow recovery in international dairy prices that started in mid-July and continued through to Q4, but then ran out of steam by December.  Upward pressure was created in part by the first contraction in milk supply in export regions since 2010.  This was down to the wettest summer in recent history, drought in America, excessive rain in the spring months in Argentina and wet weather in Victoria Australia were the main causes.

The fact that the milk contraction failed to generate even stronger price increases points to a weaker than anticipated demand level.

Prices increased from mid Q3 in 2012 but stabilised by end of Q4 2012.  Prices were 3% higher than opening prices in Q4 and 20% up on July prices.

Milk production growth in key export regions, Aug 2012-Oct 2012
YOY percent change

Oct 2012

Aug through Oct 2012

EU

-1.2

-1.3

US

-0.1

-0.3

NZ***

6.5

4.9

Australia

-1.4

0.4

Argentina

-2.8

-4.5

Brazil

1

0.3

Total*

-0.3

-0.2

*Rabobank estimates, **Nov and three months to Nov
Source: Rabobank, AMI, USDA, DA, CEPEA, Alimentos Argentinos, 2012

Going forward into 2013
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 prices 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 country.

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, a trend that 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.

The effect on cheese
Stocks are going to remain tight through Q1 of 2013, keeping prices on the high side even though demand is still weak.  The spot cheese prices in the USA started the year around $1.60 and despite a quick run high in March, the cheese price moved down around $1.45 in April.  Then the cheese price ticked higher and the block-barrel average reached nearly $2.10 in October, but then quickly declined in November and ended the month around $1.80.

I expect prices to fall back slightly by the end of Q2 as long as we do not have any further adverse weather conditions coming from the southern Hemisphere and we do not get a spring and summer like last year.  Demand is still going to be challenging all the way through 2013 as Europe and the USA deal with their debt problems.

All in all, I predict that prices will stay as they are for most of the year and will fall back in mid Q2 and move back up in late Q3.

Cheese – the very long view
Scientists led by University of Bristol’s bio geochemist Prof Richard Evershed say they have evidence that humans in prehistoric Europe were making cheese as early as 7,000 years ago.  The processing of milk and particularly the production of cheese were critical in early agricultural societies as it allowed the preservation of milk in a non-perishable and transportable form.  So it is something of a paradox to see a debate going on in the cheese industry as to whether its industrialisation, in essence an extension of making cheese less perishable and more transportable,  is now killing its soul, or breathing new life into an old tradition.  One of France’s oldest cheeses, fourme de Montbrison, is a case in point.  Now only produced on site by one farmer, it is on the verge of extinction.  Produced since the Middle Ages, fourme de Montbrison is made from cow’s milk and is very good for fondues and raclettes.  The hardiness of the mountain area between St-Etienne and Clermont-Ferrand, with its baking summers and bitterly cold winters, contributes to the cheese’s unique flavour.

But today, this cheese made into tall, cylindrical blocks, with a characteristic orange-brown rind – a natural dye from spruce wood – and a cream-coloured pâté, marbled with greyish-blue streaks and musty scent and dry taste, is on the verge of extinction.  Last year, one of the cheese’s largest makers closed, leaving only three.  Sounding the alarm, Véronique Richez-Lerouge, president of the Fromage de Terroirs Association, says many have fallen foul of giant industrial groups, in particular, Lactalis.  In her book, France, Your Cheese is on its Way Out!, she claims that such groups infiltrate cheese unions and the governing bodies of French and European labels of origin, known as AOC or AOP, and water down their rules.  “Their dream is to authorise pasteurisation,” she said. “It makes manufacturing easier and satisfies supermarkets as the cheese keeps a standardised taste for longer.

Lactalis accounts for 70 per cent of fourme de Montbrison production, and all of its cheese is “thermalised” – briefly heated to kill bacteria, but purists say this procedure also destroys its taste. While it is allowed under AOP rules, Miss Richez-Lerouge said: “It brings down the quality of a unique-tasting product and consumers drop it.”  She said 90 per cent of cheese in France is now industrially made, leading her to conclude: “This is the final act for true cheese.”

Philippe Olivier, president of the Fédération Nationale des Détaillants en Produits Laitiers, disagrees with Miss Richez-Lerouge’s dire warnings about French cheese.  “Unpasteurised cheeses are gaining ground, some are even rising from the ashes,” he said.

“One should be careful not to knock Lactalis. It makes industrial cheeses, but it also produces the highest number of AOC cheeses in France: some countries impose pasteurised cheese. From the moment one has the choice between the two, the consumer can decide.”

As for suggestions that France’s cheese traditions are dying out, he said: “The number of cheese shops in France is growing and the demand for our cheese training centre in Paris is huge.  Last year we opened 10 cheese shops in Bordeaux.  Sons and daughters are taking over from their parents, unlike 30 years ago.”

The French, he concluded, have never had such a taste for cheese.  In 1900, they ate around 4kg (9lb) per person per year.  Today, that figure has risen to 25kg (55lb).

Regards,

Ian Galletly

Managing Director

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