A slow down in overall global production will keep supplies tight in the coming months. Milk production seasons in Oceania are fast drawing to a close and the milk will not really start flowing again until August. Milk flows are starting to improve both in the EU and the US, relative to last year. But production was lack-lustre in the early part of the year and it is unlikely the lost ground will be made up.
Global growth in milk production in 2013 is not expected to keep pace with growth in global demand for dairy products. Therefore markets have only one option to address this imbalance and that is through higher prices. Fonterra is forecasting global milk production from the 15 largest dairy exporting countries to grow by just 0.5% in 2013. This is well below the 2012 growth rates which were assessed to be 1.8%.
Stocks of certain products are building in the US market but aside from this, global stocks are thought to be relatively low. European producers are mainly concentrating on their domestic market, with demand for liquid milk and cheese accounting for the bulk of the raw milk that is being processed. This is leaving limited stocks available for production of export orientated products.
The US is focusing more on the export market and is currently the cheapest supplier of many products. US exporters are typically marketing their products at significant discounts to product sourced from Oceania or Europe. Their export efforts are also being assisted by Co-operatives Working Together (CWT). This industry funded organization provides grants known as “export assistance” to members who are exporting products. A fair chunk of the products that are exported out of the US are being assisted by CWT.
Some buyers are turning to US product simply because they are not able to source product from their traditional sources, whilst others are finding the lower prices just too hard to resist. India is also making the most of tight global supplies and is pushing more product into nearby markets such as the Middle East. When additional product becomes available in Oceania exporters may have to fight hard to win back market share in some of these markets. Depending on how much product comes out of the US, this battle could put some downward pressure on prices in the latter part of the year.
Whole milk powder (WMP) prices remain very firm for nearby deliveries. Prices are predicted to ease as we progress towards the end of the calendar year, but are expected to still be at historically high levels. The NZX Dairy Futures market provides a good indication of forward market sentiment. June 2013 futures contracts are priced at US$4800/tonne with prices for the monthly contracts steadily easing back to US$4,000/tonne for the December 2013 contract.
Demand for WMP remains very robust. China’s imports of WMP during the first four months of 2013 were 55% up on the same time last year. Imports by Algeria during Q1 2013 were in-line with the previous year. Algeria is the second largest importer of WMP behind China. Import statistics can however be distorted, especially for a country such as Algeria which buys irregularly and in large quantities. Algeria is currently in the market again and is likely to soak up any available supplies out of Europe.
Some buyers opted to sit out of the market during the period when WMP prices went sky-high. These buyers have relied on in-market supplies to meet their immediate requirements, supplemented by deliveries of product that was purchased earlier at lower prices. These buyers are now looking for prices to ease as availability of product increases when the new dairy seasons’ get underway in Oceania. But an over-reliance on a strong start to the new production season could see prices rebound due to a surge in demand as buyers look to replenish their stocks.
An increase in volumes of WMP available on the GlobalDairyTrade (GDT) platform has assisted in an easing of prices over the past month. GDT volumes had got to very low levels but Fonterra found a little extra product to add to the auction which helped bring prices down from their extreme highs. From next week’s auction onwards buyers will have a choice of two suppliers of WMP as Amul joins GDT as a seller. Amul is India’s largest dairy brand. India does not traditionally export a lot of WMP, with its exports focused more on SMP. In fact last year it exported just 44 tonnes of WMP, so on that basis you would not expect Amul to have much product to offer on GDT. Product specifications indicate the product to be supplied by Amul should at least match or exceed the quality of that offered by Fonterra, with the main difference being the Amul product is sourced from a mix of buffalo and dairy cow milk whereas Fonterra’s WMP is sourced solely from dairy cows.
Skim milk powder (SMP) prices have eased by around 6% over the past month. This is based on the Agrifax weekly price series of sales by Oceania suppliers. Across the globe prices vary considerably for SMP and non-fat dry milk. Within Oceania there are two pricing tiers, with the variation depending on timing of deliveries. This price differential is as much as $1000 per tonne depending on supplier. Across global suppliers there is huge variation in prices. The latest GlobalDairyTrade auction resulted in buyers paying US$5,330/tonne for July deliveries of Fonterra’s Medium Heat product while regular Medium Heat SMP supplied by Arla and DairyAmerica sold for US$3,840/tonne and US$3975/tonne respectively in the same delivery period.
SMP Futures contracts on the NZX have traded out to October 2013. The market is also displaying a downwards sloping forward pricing curve for this commodity with futures prices ranging from US$4950/tonne in the nearby contract down to US$3770/tonne for the October 2013 contract.
The supply of globally traded SMP is not nearly so dominated by New Zealand as WMP is. Therefore buyers do have more purchasing options but many remain committed to Oceanic suppliers. Hence there is currently a variation in regional pricing. But not all global suppliers are able to produce the exact type of product required by certain buyers.
Mexico, China, Indonesia, and Algeria are the largest importers of SMP. Other Asian markets such as Malaysia, Philippines, Singapore, and Thailand are also heavily dependent on imports of this product. During the first four months of this year China imported 26% less SMP than it did in the same time period last year but volumes were higher than they were in 2011. The drop in demand from China for SMP has been more than offset by higher demand for WMP, indicating there is still strong overall growth for dairy in this market but the format demanded is changing. The volume of infant formula being imported by China in retail-ready format is on the rise with imports up 37% this year to date. China’s infant formula market is now priced in three tiers with the highest prices being commanded by foreign product imported in ‘packaged for retail’ format, the next tier is for product processed and packaged in China from imported ingredients, while China’s own domestic brands are the cheapest on the supermarket shelves.
Butter prices remain very buoyant despite stocks growing in the US. Prices for butter from Oceanic suppliers have bobbed around in recent weeks but are generally slightly weaker than they were a month ago. In the European domestic market butter price continue to firm. As is often the case, butter prices in the European market are well above global market prices. The opposite is the case in the US, where domestic prices are below the global market. High stocks in the US market are responsible for much of this difference.
In the US market stocks are growing. In the month of April butter stocks grew by 22% and ended the month 22% up on year ago levels. Demand for cream for other applications is not particularly high at present which is resulting in more cream being put through the butter churns. The growing stocks are one of the factors that have contributed to a decrease in butter prices in this market over the past month.
European butter supplies are relatively tight. Some butter has entered into Private Storage Aid (PSA), but volumes are down on the previous season. PSA is a scheme which attempts to even out the seasonality of butter supplies by putting product into storage during the high production season and then releasing it from storage when production is lower in the winter months. Butter prices in Europe are approximately US$1000 per tonne above global market prices and a massive US$1600 premium over US butter. The premiums currently available in Europe are at such levels that it would be profitable to import product into the EU despite the very high tariffs.
From July 2 onwards DairyAmerica will begin selling butter on the GDT platform. DairyAmerica represents some of the US’s largest butter producers who no doubt see GDT as a good option to gain further exposure to the global market. Much of the butter sold out of the US this year has been assisted by grants from CWT. These grants give the US exporters a further price advantage over their global competitors. The majority of the butter exported from the US is going into the Middle East. The US has significantly increased the volume of product it exports to countries such as Saudi Arabia and Iran. The increase in the US’s butter exports to Iran is virtually identical to the decrease in New Zealand’s exports to this nation. This year Iran has also sourced more butter from the EU than it did a year ago.