GENERAL In spite of (……or maybe because of) the SIAL food exhibition last week, which did very little to lift spirits, the EU market activity remains lackluster with little activity of note other than a further erosion of prices for powders and cheese. Even though the world market has absorbed more dairy products YTD than any time before in history, we can observe a clear reversal in buying appetite since August. This is clearly illustrated by the decline in export growth from ALL major export regions. This, along with the continuing growth in milk output goes a long way to explain current price levels. The answer to the question if current discounted price levels are including all the negative market factors in full remains a tough one. We believe chances are we haven’t seen the bottom yet.
There are a number of bearish factors at play:
·EU milk production was + 5,8% up to July (estimate for the whole year + 4,2%)
·On top of that, Russia that normally imports 3% of the EU milk production announced a ban in early August, effectively increasing EU’s milk surplus by an additional 1,25%
·USA has increased its milk output by just over + 2% YTD September
·New Zealand milk output up to August + 12,5%
During the first half of the year strong export demand initially absorbed the lion’s part of the additional milk but with each passing month the absorption rate grew less. To a small degree at first but exponentially growing over the months. At first China imports continued at record levels in spite of them effectively having stopped buying in March/April. Since August however we can see a clear first effect of the ‘China Factor’ and in September the import figures of China show a steep decline. That it took so long to show up in import statistics (they stopped buying nearly half a year ago) may be explained out of existing old long term contracts that continued to be shipped. This week China import figures for September were published. The declines are as spectacular as previously the increases were:
China imports YTD Aug 14 vs 13 in % YTD Sept 14 vs 13 in % ∆ % change
SMP 53,5 34,7 -35,14
WMP 65 56,5 -13,08
Whey / Derivatives -6 -7 -16,67
Butter 108,2 94,3 -12,85
In a month to month comparison the figures are even more staggering and offer little- if any - reason for optimism:
China imports sep-13 in % sep-14 in % ∆ % change
SMP 26344 16132 -45,20%
WMP 15327 9386 -63,30%
Whey / Derivatives 57825 35410 -13,80%
Butter 4752 2910 0,60%
There have been a lot of speculations as to when China will return to the market. A lot of these we must presume to be driven by hope rather than anything else. Fonterra CEO Theo Spierings assured us this week that China will be in the market again in December. We are less convinced about this. Just assuming he’s correct for a moment though, what does it imply? For both the EU and USA it does not offer any solution to their respective issues as most imports into China early in the New Year will be sourced from NZ on the back of preferential import tariffs. That is until the quotas have been used up which can easily last until well into February. Besides the tariff issue both the EU and USA are also considerably over priced compared to NZ. On the last GDT WMP was sold for the Dec and Jan contracts at € 1950 by Fonterra. Those prices coupled with the tariff advantage NZ has implies a price gap with EU of abt € 850/t. For SMP the price difference is a bit smaller but still about € 200/t. The gap with USA is even bigger. The same goes to an even bigger extend for products like Cheese, Butter and AMF. Whatever the case, if China comes back to the market in December, this still means another 2-3 GDT’s to go before the market is going to be saved by China.
In the same interview Mr Spierings mentioned that $ 3500/t is considered a fair price. We assume he talks about the Average Winning Price on GDT. This price was last established in July this year. Before that it had been significantly higher. Prices had been driven up by a poor milk output in NZ during the first half of 2013 that had carried over in the second half of 2013. Starting February this year prices have been going down consistently. In the same period, milk output grew simultaneously in NZ, USA and EU.
Clearly the growth in China imports is still there but at the current pace of decline versus the year so far, it will be much less than expected. There are stocks in China. In substantial part, these are unsold stocks. With this knowledge in mind we should ask ourselves if we really need to produce more milk. The cooperatives seem to think we do judging by the encouraging milk prices they continue to pay. But, if we see that the moment milk production has recovered to 2012 levels and above, prices start to go down, what are the odds of a commodity price recovery? Is there any reason to believe that China imports in 2015 will improve compared to 2014? Other countries have increased imported volumes significantly but it has not been enough to stabilise prices. Next year the EU milk quota system will stop. Seeing the investments on farm level and processor’s level, what are the odds there will be less milk than this year? There has always been a lot of talk about the connection between oil and dairy prices. Whilst we have never been able to detect a perfect linear connection between the two, we have certainly seen a clear relationship. In that respect, a crude oil price at a level last seen in late 2011 may be viewed as a bear factor.
It will be interesting to see developments next week. There will be a GDT and EU Coops will publish their November milk prices.
* TMV = Theoretical Milk Valorisation in these product combinations. ** Values are calculated on basis of current salesprices and are including processingcosts but excluding revenue out of by streams or optimisations.
To the surprise of many, butter seems to be stable to firm which is odd as the general understanding is that the industry moved out of cheese and into SMP so where is all that Butter going? WMP stable. All the rest of the products eroding further in absence of an animated marketplace. Casein(ate)/Butter/Whey remains the best valorisation. In fact the only combination of the three that justifies the current milk prices.
For clarity’s sake: The Dutch quotations are a reflection of the week prior to this publication. The TMV indices are a reflection of the market today.
WHEY & WHEY DERIVATIVES
Higher WPC’s remain stable. WPC80 continue to trade at levels around the € 7000/t. WPC35 prices are stable to weaker following SMP movements. SWP weaker.
Nevertheless, Whey and its derivatives remain to a less bearish outlook because of expected declines in Cheese production. Also Lactose seems to be more in demand which makes sense because the combination of lower cheese production and more requirements for standardization.
SMP again weaker this week. Export business seems to become more difficult to book. The current pricing for SMP lies between € 1850-€ 1900,-/t depending on origination and/ or final export destination, but even lower prices have been done. Feed SMP made a nose dive this week and is now traded around levels of € 1630/t.
FCMP stable. Prices between € 2300-2450,-/ton depending on origination and/ or final export destination. Given current Oceania pricing however, exports are unlikely to occur and the product remains under pressure.
Caseinate pricing stable(ish). Caseinate priced today between € 7450-€ 8200/t., but we hear of even lower prices. Fonterra seems to be selling the high end quality at the low end of this price range. Acid casein weaker at a level of around the € 7250/t and Rennet weaker too. Lowest we heard this week was a level of € 6700/t for Rennet casein. In view of the current developments in SMP the market the trend remains down. In SMP equivalent, prices should have to be around € 6000/t but there’s still a long way to go before we are there.
Nijmegen, 29th October 2014 Robert Schorsij
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