June 10 – 2016 – Vol. 13 – Issue 6
Market Matters
2016 Recovery: Tale
of Two Hemispheres
Milk supplies are contracting in the Southern Hemisphere, but a
long­awaited slowdown in the Northern Hemisphere has proven
to be elusive.
Despite lower prices, producers in Europe continue to increase
milk supplies. For first­quarter 2016, EU­28 milk production
expanded 5.8% over 2015, after adjusting for leap year. March
production in the EU­28 was 5.5% higher than the previous year.
However, in first­quarter 2015 many producers in countries at
risk of exceeding quota had cut production substantially, thus
2016 output is being compared to much weaker 2015 production.
Bad weather slowed growth in April, and output in France and
Ireland dipped below year­earlier levels.
Pinched by tight margins, New Zealand producers are expected
to decrease milk output over the coming season by 2–3%.
Forecasts for next season’s milk prices call for at least a 10%
increase compared to the 2015­16 season. While there has been
plenty of talk regarding the severe hardship experienced by
farms, milk flows in the second half of the 2015­16 season have
been surprisingly resilient. That means milk production could be
higher than expected in the coming season as well, especially as
weather continues to improve and La Niña comes into play.
Expected changes in milk output in 2016 (billion liters)
EU
2,3
US
Without a dramatic turn of events, the 2016 year­over­year milk
production gain in Europe will again be hefty. Much of Europe’s
expected year­over­year milk increase of at least 1–1.5%, based
on projections from both sides of the pond, will be made into
butter and skimmed milk powder and then put into government
storage or shipped to foreign shores.
No U.S. Slowdown
U.S. milk producers also continue
to defy expectations. In April,
year­over­year output in the
United States was 1.2% stronger
than the previous year. The gain
was largely driven by improved
production per cow, but the milk
herd also expanded. U.S. dairy
producers added 16,000 head in March and April, bringing the
total milk herd to 9.331 million cows, the largest since December
2008. Cool temperatures have prolonged this year’s flush, but
typical summer weather could cut into production over the next
three months. Unless the herd contracts, though, there will be no
shortage of milk; USDA expects 2016 output to grow 1.5%.
NZ
Australia
Argentina
1,4
­0,6
­0,4
­0,6
Source: USDA, Eurostat
The milk supply in Australia’s southern export regions is also
expected to continue falling in the coming season, due to milk
price reductions implemented by the country’s two largest
manufacturers and the potential for milk prices to fall to near $5
(A) per kilograms of milk solids. As the new season begins,
negative sentiment will prevail due to current price reductions
and repayment of “overpayment loans” that will cut farm milk
payments for the next three years. Feed supplies are good,
though, which could alleviate financial pressure for many.
Argentina’s woes are expected to continue due to a combination
of excessively wet weather and poor milk prices. Argentina’s milk
supply will likely continue to contract, with some estimates
calling for a 10% year­over­year drop in output over the rest of
2016. That should keep export shipments to markets outside the
Mercosur region to a minimum.
Page 1
June 10 – 2016 – Vol. 13 – Issue 6
Hoogwegt Forecast
U.S. Average Prices
$/ton
$/lb
Trend
EU Average Prices
$/ton
$/lb
Did You Know?
Oceania Average Prices
Trend
$/ton
$/lb
Trend
SMP
1.830
0,83
Stable
1.940
0,88
Stable
1.900
0,86
Stable
FCMP/WMP
2.535
1,15
Stable
2.385
1,08
Stable
2.200
1,00
Stable
Butter
4.630
2,10
Firm
3.460
1,57
Firm
2.900
1,32
Firm
Cheddar
2.860
1,30
Firm
2.900
1,32
Firm
3.000
1,36
Firm
SWP
600
0,27
Stable
765
0,35
Firm
Lactose
660
0,30
Firm
795
0,36
Firm
U.S. prices stated ex­works / incl. expected CWT subsidy where applicable;
world prices stated FOB main port; EUR/USD: this week 1,135
World Comment
The International Monetary Fund recently cut its
outlook for world growth in 2016 to 3.2%, but
growth is projected to strengthen in 2017 and
beyond as conditions in developing regions
gradually stabilize.
New Zealand’s milk flows—once widely expected to
drop 10% in the recently completed 2015­16
season—will actually be closer to a 3% decline.
When the European Union last built an intervention
stockpile in 2009, it took close to three years from
the end of buying until the 268,000­metric­ton
inventory was eventually cleared.
Europe has passed its seasonal peak in milk production, in the coming
weeks we will see week­on­week decreases. This will have some effect, but
at the moment it seems unlikely that this will change market sentiment
dramatically. In this week’s European Milk Management Committee tender another 36.000Mts of SMP were accepted into Intervention.
Furthermore the intention to increase the ceiling to a total of 350.000Mts was re­confirmed. On the more bullish side we have clearly seen
more activity in Europe in liquid/fresh products like cream and skimmed milk concentrate and increasing prices in the last few weeks.
Furthermore we have seen all European SMP notations move above IV equivalent. As the European Market continues to be key for market
developments for the rest of the year we will have to follow closely what will happen in coming months.
Butterfat and Cheese market has continued to strengthen as well in Oceania and US, but, after the rally of the last weeks, some buyers are
showing some hesitation in accepting new prices. Whole milk market is fairly quiet and stable; buyers are awaiting new season offers from
New Zealand. All in all we have seen a bit more activity the last weeks, but clearly too early to say market has changed fundamentally.
Bring it Home
Risks to Burgeoning Recovery Remain
The world economy is expected to improve through 2016, but
troubled Latin American economies and Russia will continue to
struggle. While global supply and demand for dairy commodities
is beginning to tilt ever so gradually toward a slow recovery,
sustained prices above $3,000 (U.S.) per metric ton for
commodity milk powders aren’t expected until well into 2017.
Demand from China was encouraging at the start of this year, but
it has since slowed. Chinese consumers, who prefer fresh milk
products and imported infant formulas, could prove instrumental
in limiting future expansion of milk powder purchases. In April,
China imported 94.6 million pounds of skim milk powder (SMP)
and whole milk powder (WMP) combined, a steep 35% drop from
March volumes, according to some sources. Year over year,
China’s dairy imports in April fell 15% below April 2015 levels.
Low prices have allowed many buyers to cover future needs, but
overall sales volumes are likely to be at or below prevailing
demand trends. African and Middle Eastern countries exposed to
crude oil revenues are buying more cautiously than before crude
prices crashed, and Venezuela continues to be absent from the
global market.
While cooperation between Russia and major Western powers
has improved in geopolitical arenas, Russia is not expected to
resume imports of cheese and butter from the European Union
and others before 2018 unless there is a quick recovery in the oil
market. Yet even if Western exports do resume to Russia before
2018, import volumes likely will be smaller than pre­ban levels.
Large global stockpiles of milk powders, cheese, and butter need
to be worked through before any momentum in rising prices is
feasible, and how the European Union chooses to release its
growing intervention stocks going forward will have a major
bearing on the pace of a global dairy price recovery.