Guest Columns

Perspective:
Dairy Markets

The ‘longest’ participant in dairy: the European Union

Trevor W. Slegers

Trevor W. Slegers is a risk management advisor at Rice Dairy*, a brokerage firm in Chicago that specializes in dairy and markets at dairy’s periphery. He contributes this column exclusively for Cheese Market News®.

Every year or so there seems to be one over-arching theme that the dairy market focuses on domestically or internationally. In early 2015 the focus was on New Zealand and its milk production. At the time, the threat of a drought pushed the U.S. spot nonfat dry milk (NDM) price more than 20 cents higher in less than one month. After that move, folks who had never heard of pasture growth indexes in their life were rushing to the nearest Bloomberg Terminal to chart its every move. This year though, while the subject remains international, the focus moves to the European Union (EU).

At present, there are a couple of different elements driving the market, which are causing repercussions back here in the United States. First, the much anticipated removal of quota, which was made official April 1, 2015, increased milk production across the continent.

Prices did what prices usually do when supply runs rampant and took a nosedive.

Ultimately that lead to the second aspect of the EU market that my colleagues, other peers in the industry and myself have been forced to pay close attention to: public intervention. Questions on its specific workings, effects on the market and game-plans going forward have been flooding in-boxes and have been the point of many conversations worldwide. At its core, public intervention is used as one of the tools by the European Commission to help farmers and stabilize price. While it has been available in both skim milk powder (SMP) and butter markets, powder is the product that has used its capabilities to its full potential for the better part of a year and a half. Over that period of time, more than 300,700 metric tons (as of Aug. 29) have been offered into the program. Now that current market prices are trading clear above the intervention level, market participants are wondering where we go from here and what will happen to powder currently sitting in storage.

Intervention first came into play in the summer months of 2015 when prices grinded to levels not seen since 2009. Underlying fundamentals surrounding the market spelled bearishness for the months leading up to the 31-year long milk quota officially coming to an end, resulting in a sharp increase in milk production across the continent. Add to that the ongoing issue of Russia being out of the market because of its import ban, more milk going to SMP production and China’s once insatiable demand for dairy depleting, and in the minds of farmers you end up with a trigger for subsidies.

Increased milk production by those farmers in the late-2015 to early-2016 months led to increases of 5 percent to almost 10 percent by February for EU-28 countries. After the powder EEX futures price rose to more than 2,300 euros per metric ton (due to the aforementioned threat of drought in Oceania) prices spent the spring and early summer tumbling more than 25 percent, falling to 1,675 euros per metric ton by early autumn.

Cue the commission buying. At a fixed price of 1,698 per metric ton ($0.87/lb. in today’s market) product began being offered into intervention. By the end of 2015, total volume reached 41,328 metric tons, then reset for the new year. Throughout this year, volume continued to pour into the government scheme in an effort to support prices. Initially the scheme was scheduled to end by the end of September, but with market conditions remaining largely unchanged, the EU announced an extension until the end of this year when it will most likely reset and remain open until the end of September 2017. Not only was the commission forced to put through multiple extensions, but it also was pressured to raise the ceiling of product from 109,000 metric tons to 218,000 metric tons on April 20, only to be lifted again on June 30 to where it stands now at 350,000 metric tons, more than 3 times the original limitation.

So, as it currently stands, the EU holds the largest inventory of SMP in the world. Furthermore, everyone knows this. As the government is not an end user, the product must return to the market. The question now is, with current spot and futures prices trading above intervention levels, when and how will product held in inventory come out to the marketplace?

Unfortunately, there is no clear answer. We can look at history, when back in 2009, the government waited until prices got to 2,300 euros per metric ton before releasing product, but that is no guarantee it will do the same this go around. Speculation and rumors are that the government will almost always try to make intervention a profitable service, waiting for the opportune time to commence the sell-back. On a positive note, the European Commission itself is a consumer of dairy, through various food and aid programs, so there is in some respects an alternative to a bulk release of product on the market. Additionally, time is on its side given product must be less than 3 months old to be accepted in the program and shelf life exceeds 3 years, if stored properly.

At the end of the day, will the market be resilient enough to take on the excess powder currently not in the marketplace? The opportunistic side of me believes it will. While supply has massively out-paced demand, demand itself has been healthy, and as the two forces come back into line, there is reasonable cause to believe that the surplus will eventually be absorbed. The latest figures of the amount of powder going into intervention have diminished to 116 metric tons for week of Sept. 5, as the trend continues to zero.

Thanks to EU milk production seeing more rebalance, the EEX futures have bounced back nicely, pricing the rest of the year between 2,140-2,200 euros per metric ton and even reaching 2,300 euros per metric ton by mid-2017. The Oceania market has picked up steam as well with Global Dairy Prices seeing three consecutive positive auctions. Overall it seems as though global demand for powder is starting to pick back up after being absent for some time, which is welcomed words for the “longest” participant in dairy: the European Union.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the authors and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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