Market outlook

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Market Outlook | 15 October 2021

Dairy commodity prices continue to rally, as end users are not covered in the long term and physical stocks are limited.

Skimmed Milk Powder

Although the prices that farmers receive for milk are increasing to record levels, EU milk production is still lower than the previous year (minus 0.1% Jan–July YoY).

With milk prices ranging between 35 cents (France) and 40 cents (Ireland), dairy farming has become profitable for those farmers who can rely on natural resources (e.g. silage). However, for those who are forced to buy additional feed, margins are under pressure and even a higher milk price does not compensate for this. This also partly explains the EU’s negative growth figures.

It is expected that regions such as Ireland will continue to see strong growth figures in 2022. In France, milk production is struggling due to high feeding costs and lack of succession. EU SMP production is still down compared to 2020, and this is noticeable in the market. EU producers report that they have limited stocks and older material for feed applications is almost non-existent.

In the first 2 weeks of October the market price rallied by EUR 200/mt and many players expect the market to break the EUR 3000/mt FCA level very soon.

At Bdairy, we believe that higher prices will eventually lead to increased milk production, the re-formulation of recipes (more non-dairy rather than dairy ingredients) and lower demand (as disposal income will not grow to the same extent and is limited in large parts of the world, such as Africa). In other words, we do not believe that current price levels are sustainable in the long term.

Before all of these factors take effect, we expect there to be a tight situation for the coming 3 to 6 months and little relief is expected from either the US or New Zealand. After a very strong first semester, US fat-free and SMP production decreased sharply in Q3. This is also reflected in the milk growth figures, which only showed a modest +1.1% growth in August. Furthermore, NZ producers report healthy sales volumes and they are not under pressure to offer.

On the demand side, end users report (additional) needs for Q4 and Q1, and it seems several have been waiting too long to cover. Furthermore, after a slow period, the Asian market is now more active and is trying to secure volumes for November onwards. In general, we see that many buyers are increasing their stock levels for all kind of products and ingredients in order to protect themselves from further price increases.

Bdairy outlook: Bullish

Butter

In addition to the fact that both Germany (minus 1.6% YoY) and France (minus 1.3% YoY) showed declining milk intake figures, it was also reported that the milk contained lower fat levels, as less additional feed was given to the cows. Both factors resulted in a very tight situation for EU cream and prices rallied to EUR 6500/mt (based on 100% fat).

Following a tight supply situation, EU butter prices started to increase at the beginning of September. Even so, for the next 3 weeks the return on liquid cream prices would outperform the return for butter manufacturing, meaning that EU producers preferred to produce as little butter as possible. It was not until European end users showed an interest in additional volumes in Q4 that the EU butter market increased to EUR 4900/mt for German butter.

Furthermore, the changing dairy landscape is causing significant price differences between countries of origin. Because of a higher milk intake, Irish butter stocks are still present (+4.4% YoY production growth), whereas German and French butter stocks are limited (butter production in Germany is down by 5.3% this year). This had caused a pricing gap of EUR 400/mt by early October. Today Irish butter is still trading at EUR 4550/mt FCA.

For the coming month we expect that the price gap between Irish and German butter will remain, as German producers are still able to sell cream at premium levels. For now, the EU butter market seems to be “cooling down” and end users are starting to get used to the new price reality. However, with limited stocks in the market and high cream prices, we are not expecting a decline in prices in November and December.

Bdairy outlook: Stable

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