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Friday 23 February 2018

What's the prospects for milk prices for the remainder of 2017?

Milk prices have been recovering steadily
Milk prices have been recovering steadily

Alan Matthews

The steady recovery in milk prices since the middle of last year has been welcome news for Irish dairy farmers. According to the EU Milk Market Observatory, Irish milk prices at real fat and protein content paid to milk producers increased by 30pc in April 2017 compared to April 2016.

The Ornua Purchase Price Index (PPI) increased steadily from June of last year (value of 81) and has levelled off at around 105 in the first four months of this year, also an increase of 30pc. The index is the monthly indicator of market returns on dairy products purchased by Ornua relative to returns generated in the base year of 2010.

Similarly, the Global Dairy Trade (GDT) auction price index, which is a good indicator of global dairy product prices, recovered strongly from mid-2016 to the end of last year, with prices fluctuating around a stable level since then. The improvement in milk prices was driven by a sharp reduction in milk production in the main world export regions in the second half of 2016.

The gap in year-on-year production is reducing in the first half of 2017, but according to Rabobank, it will be the second half of 2017 before global milk production again begins to exceed the levels reached in 2016.

Both the IFA and the ICMSA have expressed optimism for continuing rises in milk prices. Both organisations have indicated they expect co-ops and processors to announce further price rises for the peak delivery months reflecting the improved returns in dairy markets in recent weeks.

IFA National Dairy Committee chairman Sean O'Leary has set out 10 reasons why he expected co-ops could be ambitious in setting milk prices for April and the peak months, in order to deliver a 33c/l average price for 2017.

But do the recent trends in global dairy product prices suggest that milk prices have plateaued? There is some evidence from processors elsewhere in Europe that this may be the case.

The Dutch LTO organisation reports that some major EU processors, including FrieslandCampina and some French companies, have frozen milk prices in May while others, including Arla and Dairy Crest in the UK, have either already cut prices or proposed lower prices over the coming months.

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Meanwhile, EU wholesale markets weakened in April for most products, with the exception of butter and whey powder.

Growth

What happens to milk prices ultimately reflects trends in the global supply and demand for dairy products. On the demand side, the IMF has noted that global economic activity is picking up, with world growth projected to rise from 3.1pc in 2016 to 3.5pc in 2017 and 3.6pc in 2018.

This should have a positive effect on global demand for dairy products. Depressed demand in oil-exporting countries because of low oil prices will be offset by buoyant demand in China and south-east Asia.

On the supply side, milk production in the US is powering ahead, supported by a 20-year high in cow numbers, and is expected to grow by 2.3pc in 2017 over 2016 according to the latest USDA outlook. However, supply recovery in other regions may be slower than expected, so total production may not surpass 2016 levels until the second half of this year. This favourable supply-demand balance will help to underpin dairy product prices in the coming months.

This supply response is mirrored in the EU. EU milk production in the first two months of the year was 3.3pc below production in the corresponding period in 2016. Over the year this gap is expected to close. European Commission estimates total production in 2017 will be 0.6pc ahead of production in 2016.

There is some uncertainty about exactly when EU milk production will exceed last year's production - there was still a small negative gap in March - but most of the growth in production will occur in the second half of the year. The production increase would probably be higher were it not for the expected herd decline in the Netherlands to comply with phosphates regulation.

A particular feature of the current dairy market is the very wide spread between butterfat and skimmed milk powder (SMP) prices. Butter prices are trading at near-record levels, but global protein prices remain depressed, with SMP spot prices just above intervention levels. The European Commission continues to support SMP prices through purchases into intervention, even if the quantities are modest compared to purchases last year.

These purchases will add to the 408,000 tonnes already in storage (including public intervention stocks of 350,000 tonnes), the size of which will be a drag on any price recovery. Reducing these stocks will be difficult as the Commission is determined that any sales from intervention will not undermine any future recovery in prices.

In Ireland, co-ops will also be conscious of the need to rebuild their reserves given that many used their reserves to support the milk price they paid to dairy farmers in the second half of last year.

For the moment, uncertainty over Brexit is unlikely to weigh heavily on milk prices until after the UK June election and negotiations start in earnest in the second half of this year. The impact of the depreciation of sterling against the euro following the Brexit referendum result is already factored into Irish milk prices. But the possibility of a 'hard' Brexit is something which may come to weigh on Irish milk prices towards the end of the year.

These considerations suggest that current milk prices can be maintained over the summer months, but there may not be much scope for further increases.

Alan Matthews is Professor Emeritus of European Agricultural Policy at Trinity College Dublin


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