Hope for greater stability despite falling dairy commodity values

European dairy commodity prices for butter and milk powders fell sharply again last week, which resulted in a number of farmers contacting the Milk Development Council to ask if prices were heading back to the levels seen in 2006. Although these market developments have raised concerns, there are a number of positive factors that the industry needs to consider.

EU exports of butter and milk powders have dried up in the past few months as the record prices and lack of export refunds have made it uneconomic for EU processors to sell onto the global markets. This has resulted in an over-supply on the domestic markets, putting a downwards pressure on prices. However, it now appears that EU prices for butter and milk powders have fallen in-line with the world markets and industry commentators are predicting that a revival in EU export volumes will soon be seen.

This again focuses our attention on the world markets which seem to have an ever-increasing effect on UK milk prices. While there were reports of ‘demand-burn-off’ in developing markets as commodity prices rose, the underlying supply and demand situation is still positive, with Australian supply down 8.2% and EU production virtually static.

Cheese making2

Although prices for some global commodities have dipped in recent months, prices seem to be stabilising. Alongside this, if EU exports become more competitive over the coming months, it will coincide with restricted availability from Oceania, as they come to the end of their season, which could drive prices higher.

One country it is important to keep an eye on is the US. Their year-on-year expansion in milk production is now in the region of 4%, as their farmers react to higher milk prices. This combined with the weak dollar, gives US exporters a competitive position on the world markets. However, EU prices for products such as Skimmed Milk Powder (SMP) are now in-line with the US and with world stocks reported to be at low levels, US prices for SMP are expected to revive in the New Year.

In contrast to the other commodities, the cheese markets seem to be reflecting the supply-demand balance with prices remaining relatively firm. However, there is nervousness in the market due to the recent falls in butter and SMP prices.

It was inevitable that the markets would fluctuate wildly following the rapid price increases in the commodity markets seen earlier this year. It is now likely that buyers are hanging back as the markets drop, resulting in further drops. This corresponds with the market a number of months ago as buyers jumped in to secure supplies in a rising market, thus driving prices to unrealistic levels.

Butter pat

Buyers hanging back in a falling market go part way to explaining the large drops seen in the Northern Ireland, United Dairy Farmers auctions last week. Three-month contracts fell to 23.51ppl, 20.5% down on the November results.

Alongside the effects of a falling market, large volumes of extra milk were sold, as processors decided not to take up their options to buy extra milk at price levels set in earlier higher priced auctions. However, it must be remembered, this price is still 4.77ppl (25.5%) more than December last year.

Industry analysts are starting to suggest that a combination of factors, some of which have been touched on above, will lead to an easing of the current downward trend in EU prices.

With butter, SMP and cheese still 25%, 25% and 55% above the prices seen this time last year, the evidence suggests that the outlook for milk prices is still a positive one compared to recent years.

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