Commodity Watch - Milk Market Observatory and Commodity Price update

Saturday, 9 August, 2014

The European Milk Market Observatory was launched by the EC Agriculture Commissioner in April 2014.  The Observatory aims to provide the European dairy industry with accurate and up-to-date milk price information, with the end goal of developing effective management tools which can be utilised to ensure that a similar crash to 2007/08 is never repeated.

The Observatory provides a single internet interface, with a wealth of raw data for dairy stakeholders. The website contains all the latest dairy statistics including prices/margins as well as production levels, historical data and reports relating to the short/medium term Economic Outlook for the EU Dairy Sector.   The UFU are feeding local pricing information through to the Market Observatory and we are scheduled to attend the next meeting where we will be representing COPA.

The 2nd meeting of the Milk Market Observatory economic board took place on 24 July 2014 with a series of presentations by DG AGRI on the milk market situation.

Current Milk Market Situation

Production - Downward pressure has been increasing on milk prices since early 2014 due to higher milk supply.   However, milk collection is expected to show less pronounced growth percentages in the 2nd half of the year, compared to the same period last year.

EU Demand  - Household demand remains unchanged, yet industrial ingredient buyers are expected to return to the market in late August.

Trade prospects - Demand is expected to rebound once buyers return to the market.  Crucially all eyes are on China, who have stock piled product with a view to managing the impact upon their economy.  But once these stocks run low and they are happy that the floor to have been reached they will return to the market and demand will recover countering the rise in supply.  The latest Goldman Sachs report is forecasting a 30-50% higher demand for Whole Milk Powder this coming year.   Elsewhere, Russian imports have been stable with regard to cheese and have been increasing for butter. Algerian imports have increased for SMP and WMP. Demand from Indonesia, Malaysia, the Philippines and Singapore appears to be steady with a long term perspective.

Dairy Investment - From 2012 to June 2014, European dairy investments in Europe have been reported at €5.5 billion.  This covers 190 investment projects involving 120 companies. Not only EU companies are investing in Europe, but also Chinese and NZ companies,  which shows the attractiveness of sourcing milk from the EU. Contrary to the past, the majority of new projects are in the area of dry dairy products.

Outlook

With Oceania WMP commodity prices at a 2 year low (down 40% since February), the likelihood is that the floor as been reached.  These are pure commodity prices and therefore more volatile and hence EU prices have not fallen by the same proportion.  The gap between the two could be a concern as European sellers may seek discounted sources.  But once demand returns to the market as expected, stability will turn and prices should recover, although not to the record levels seen late last year and despite the sharp falls seen in Oceania, the Market Observatory is not reaching for the panic button as yet despite the return of volatility in the markets.