Dairy Market Update Q3 2016
As we move into the summer it is time to finally announce a long waited price recovery in the dairy industry. Significant upwards movement has been witnessed in recent GDT auctions in the last few weeks with many predicting this may be the common trend over the summer months. A slow start to the production season along with increased demand from Asia has certainly influenced the market but again the main driving force behind the global market has been the actions of the EU member states.
As mentioned in our Q2 report, all of the EU agricultural ministers met in Brussels in the Spring to discuss the crisis in the dairy industry. Prices have been falling at a phenomenal rate for the last two years which has driven the milk price down putting many farmer suppliers under severe pressure. A key factor in this was the abolition of EU milk quotas in 2015. Many farmers expanded their facilities in preparation for the removal of quotas as they believed it would herald a bright new dawn with no restrictions on milk production.
However it did not work out that way as it led to a glut of supply with no home. The EU however announced in the Spring that they would double the intervention ceiling for SMP from 109,000 tonnes to 218,000 tonnes. This greatly reduced pressure on producers as they at last found a home for their excess stock that guaranteed a fixed price. However this ceiling was quickly reached and the EU announced a further increase up to 350,000 tonnes. The EU also has a proven track record of selling intervention stock at considerable profit so it is a solution that should greatly benefit both parties by bringing the industry back to life.
Prices have significantly increased across the dairy sector as a result of this bold move by the EU. The prices for SMP and Butter have increased by around 15% as producers are no longer scrambling around trying to sell vast amounts of unneeded stock. Producers are also diverting more milk back in to SMP and Butter production as a result of the better returns so this is driving the whole market in the same direction with less milk being diverted in to other products such as cheese.
While the intervention has no doubt heavily influenced the market, we have also witnessed a weak start to the production season across the Northern Hemisphere which has further diminished stock levels. This is an example of the pressure many farmer suppliers have been under as many have been forced to exit the market due to poor milk returns that were barely covering their costs or even causing severe losses. The incentives offered by many dairies for their farmer suppliers to at least maintain or decrease production levels has also clearly worked and has helped to balance the supply demand situation across the global market.
In the UK, milk production is down 3% from this time last year. The low milk price at present has also forced many farmers to cull some of their cows as their present numbers were clearly unsustainable. It may take a bit of time before we see the milk price recover to a decent level for farmers as many dairies are reminding their suppliers that they supported the milk price in recent times where returns for commodities in the market were meagre. The current uncertainty in the market has led to buyers scrambling to tie down long term stock as it appears we have most definitely reached the bottom in terms of commodity pricing.
European prices for Emmental, Mozzarella and Gouda have seen significant increases in the last fortnight and prices continue to be supported by a falling milk supply. Emmental and Mozzarella have seen especially sharp movement with respective increases of €500/tonne and €400/tonne. Fat prices have also reflected the falling supply with butter now up at £2400 per tonne, the highest price seen in over 5 months. Demand is active as concerns grow over dwindling SMP supplies, although first quarter production volumes of SMP grew 18% on last year, much of this has gone into intervention.
It is tough to predict exactly what will happen over the next quarter due to the great uncertainty over supply at the moment. However we may be looking at prices steadily increasing over H2016 as some shrewd observers predicted at the start of the year. We at Ingredient Solutions will ensure we keep our customers updated on any movement as we understand the concerns of our customers on increasing prices.
I am also proud to announce that Ingredient Solutions recently achieved an AA BRC grade along with the BRC Traders & Brokers Accreditation. This highlights our commitment to working to the very highest standards demanded in our industry and you can be assured you are in safe hands with us as a supplier.