Market Report Q4 2015

Dairy Market Update Q4 2015

Market report

It was yet another strong production season in Europe and prices eased further downwards again over the summer in what is now becoming a familiar pattern. The UK especially enjoyed a bumper season with cumulative production from April to August at 3687m litres. This is 131m litres higher than the 2014 production season which was also a highly successful period for processors. Conditions were ideal and the UK did not get flooded with cheap EU milk as first feared after the abolition of quotas.

Naturally the extremely healthy production situation and the long-standing glut of supply across the continent have yet again caused market prices to move downwards. European milk prices were put under further pressure as a result which concerned many observers who feared the long-term consequences of a low milk price. However milk processors were adamant that prices would need to stay low as they were not getting value in the marketplace.

Despite this, there have been encouraging signs in the UK that retailers are now finally reacting to the pressure being put on them by farmers worried about their long-term future. In a significant move in August, retailers Aldi, Asda and Lidl announced a minimum price of 28ppl that it will pay for milk. Morrisons announced a lower price of 26ppl but have made up for the difference by launching their ‘Milk For Farmers’. This is an initiative which will see prices for milk and cheddar increase with the extra revenue made as a result going back to the UK farmers. These long-awaited compromises have greatly pleased co-op members.

Cheese prices continued to gradually ease downwards in Q3 with Russia’s continued absence from the EU marketplace a big factor. The Russian absence is now expected to continue until 2018. White Cheddar and Mozzarella were both around the €2600/tonne mark as we moved into Autumn. There is still a slight shortage of Coloured Cheddar on the market however due to a lack of production. The use of Whey off White Cheddar production is making it much more attractive to produce for dairies who are enjoying high returns in export markets.

Despite the supply heavy situation we experienced in the marketplace over the summer, we have finally experienced signs of a recovery in prices. The latest GDT auction saw prices increase by a healthy 16.5% and this is the third consecutive auction where prices have been increased. There was 29% less volume at this auction than the one at the same time last year. This is a clear indication that we may have reached the bottom and the only way for prices to now go is upwards. Global commodity prices soon followed the lead set by the last few GDT auctions.

There are several key reasons for the sudden tightening of commodity prices. There has been a big increase in interest for longer term contracts as buyers sense that now is the right time to lock down long-term volume. Another factor is the resurgence of China as they are making moves to significantly enter the marketplace again and processors hope it is in the same style that saw volumes sold dramatically increase in 2012/13. China increased SMP purchased by 8% in July and many see this as a sign of a long-awaited comeback. NZ and Australia have benefited most from the increased buying. It was much-needed as China’s dairy imports were down 20% from 2014 and this had a huge knock on effect.

In other news, Muller Wiseman are on the verge of completing their takeover of Dairy Crest’s liquid milk business for £80m. This division has long been a problem for Dairy Crest as they had been making losses in a very challenging market environment. The deal had been held up by the Competition and Markets Authority but it seems several obstacles have been overcome and full confirmation of the deal is inevitable. If it does eventually go through it would mean Muller, Arla and First Milk would be the three dominant suppliers to the UK liquid milk market. The deadline for the deal is October 19th so expect an announcement very soon.

Looking ahead there are reasons for farmers to finally feel optimistic again with the recent recovery of global commodity prices. Obviously our customers have been happy to witness cheese prices lower to pre 2012 levels but it would be potentially disastrous for the industry in general if prices kept falling at the rates we have seen in 2014/15. We don’t want to see farmers forced out of the market which has been feared and a general recovery in prices is what the industry has needed. It appears the bottom may have been reached so it will be interesting to see how the market reacts in Q4.

Again I would like to thank all of our customers again for their continued support. We have witnessed a great year so far at Ingredient Solutions with healthy growth experienced again in a challenging market. I hope we have assisted our customers by keeping them informed on any market developments with swift action taken when there has been significant movement on pricing. We will be in touch regularly in the run up to Christmas and we wish you all the best in your preparations for the busy festive season.

 

Yours Sincerely

Ian Galletly

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