Quarterly Report – 1st quarter 2011

Well it’s that time again, when we try to give you some guidance on the Cheese and Butter Markets. First it’s worth having a look a food price trends in general and see what the big picture reveals.
UK Food Prices
History, Henry Ford is reputed to have said, history is bunk. What he actually said is something rather different, more subtle and worthy of consideration in the current economic climate. “History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today”. Ford gave this quote to a journalist on the Chicago Tribune in 1916, when the Great Depression wasn’t on anyone’s radar.
The UK industry is in the process of making history today, certainly in terms of price inflation at any rate. The all items Retail Price Index (RPI), a benchmark for gauging real changes in food prices rose by 31% over the last ten years with an 8.1% rise in the last three years to June 2010. But that rather sedate trend of just over 3% a year concealed a roller coaster of prices movements. Food prices actually declined in real terms by around 12% between 1998 and mid-2007, but then rose rapidly. Butter prices rose by 56% over the ten years to June 2010 with almost all the rise coming in the last three years. Since mid-2007 prices of all foods have risen substantially and by July 2010 prices were substantially higher for eggs 46%, butter 43%, pork 36%, cheese 27%, milk 26%, beef 23%, bread 22% and poultry 17%.

Prices moved up in the 3rd quarter of 2010 and levelled out again in the 4th quarter for most cheeses. The exception was Italian hard cheese such as Parmiggianno Regianno and Grana Padano, which have moved up over €2000 pmt. This increase was down to the Italian government who sold off 130,000 wheels of this product to third world countries 15 months ago. This was done to maintain prices on these products and provide a better return for the manufacturers and farms in Italy, at a time when the prices of these products were falling. This action has left the market short of ripened cheese in the short term and the stocks will not come back into balance until the middle of 2011 and prices will hopefully ease of a bit at that time.
So what’s in store for the rest of the cheese market for the 1st quarter of 2011? I believe there are good stocks of most cheeses so we should see prices ease off in mid February as the big producers start to clear out stock before the main flush of milk in the late April to June period. Also demand in the 1st quarter is normally slow, so this combination should drive prices down. As well as this there are a few big producers being pressurised by their banks to reduce their cash demands.
Butter fat has been in short supply in Europe all through 2010, this was down to production being back by 9% or 50,000 tons in the 1st quarter of 2010 and producers have been trying to catch up since. Butter prices have eased just lately but are still above the norm. Butter is still in short supply and I believe the butter price will remain high until the 3rd quarter of 2011.
Saying all of this, the “one elephant in the room” is the currency. I have found it hard enough to try to predict the dairy markets in the last two years even with some knowledge and insight to this market, without trying to predict the currency markets which I have little knowledge of. You would need the wisdom and insight of Gypsy Rosy Lee and her crystal ball to predict what currencies are going to do. The Pound / Euro position has oscillated between 0.91 and 0.81 over the past twelve months with alarming frequency.

The one advantage Ingredient Solutions have to assist in protecting our customers from currency movement is we can purchase from Europe or the UK so that we are never ever totally exposed to either currency.
I would finally like thank you all for your loyal support over last year and wish a Merry Christmas and a Happy New Year and I look forward to working with you in 2011.

Ian Galletly
Managing Director



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