While the in­dus­try makes head­lines, the mar­ket turns

Dairy News Australia - - MARKETS - STEVE SPENCER • Steve Spencer is a Di­rec­tor of www.fre­sha­genda.com.au

BY THE time this col­umn gets into the hands of read­ers, we’ll be get­ting close to the peak of the pro­duc­tion sea­son in south­ern Aus­tralia, in one of the most tu­mul­tuous pe­ri­ods in the re­cent his­tory of the in­dus­try. In the past 18 months, an un­prece­dented vol­ume of milk has moved be­tween ma­jor dairy com­pa­nies in a short space of time, and most likely has some way to go yet, as the af­ter­shocks of the ma­jor step-down in milk prices to­wards the end of the 2015–16 sea­son con­tinue to re­ver­ber­ate. There is plenty yet to un­fold. We’re just at the be­gin­ning of re­solv­ing the fu­ture of the once-dom­i­nant pro­ces­sor, as a num­ber of play­ers (re­al­is­ti­cally fewer in play than the fi­nan­cial me­dia would have you be­lieve) fathom the avail­able “prize” and work out how to make the shell of MG work in their hands — milk, plants, ca­pa­bil­i­ties and brands. Still, there is a sig­nif­i­cant sell-job — be­yond any­thing yet seen from the PR gu­rus at Fresh­wa­ter Place to date — to clear the 90 per cent share­holder ap­proval re­quire­ment. The deep down­ward global mar­ket spi­ral that sparked the lo­cal hor­ror story bot­tomed around the time of the MG and Fon­terra step-downs. Since then we’ve seen a grad­ual but strong im­prove­ment in dairy com­mod­ity prices as the mar­ket re-tight­ened — helped by a mas­sive pur­chase of sur­plus milk pow­der by Euro­pean gov­ern­ments. While a lot of at­ten­tion here has been given to the re-al­lo­ca­tion of half of MG’s milk amongst its ri­vals, and whether the sea­son de­liv­ers enough to help rebuild farmer con­fi­dence and bal­ance sheets, in the back­ground the global dairy mar­ket peaked and is weak­en­ing again. Al­though many who were pre­oc­cu­pied with lo­cal in­dus­try machi­na­tions, the com­mod­ity value of milk (in our cur­rency) spent a short pe­riod at giddy heights seen rarely in the past. You could be for­given for not notic­ing the cy­cle has made a turn. Why? Well, once again — in­evitably — the is­sue comes from the sup­ply side as higher prices have done their work. Milk pro­duc­tion is now grow­ing in all ma­jor pro­duc­tion re­gions, with both Europe and New Zealand head­ing for a stronger lift in out­put com­pared to a year ago, which will con­vert into larger sup­plies of ex­portable sur­pluses.

The global dairy mar­ket has peaked and is weak­en­ing again.

The de­mand side re­mains patchy with the Mid­dle East, Rus­sia and South Amer­ica im­port­ing far less, while China’s re­cent surge seems frag­ile. Bet­ter prospects for oil prices may help de­mand a lit­tle. At this stage it would seem that the risks of sur­pluses are mostly in cheese and — un­sur­pris­ingly — skim milk pow­der (SMP), which is, for a while yet, the of­fal of the dairy in­dus­try. After lock­ing up a ma­jor stock­pile of SMP last year at a cost of more than €600 mil­lion, a tighter Euro­pean mar­ket forced pro­ces­sors to keep their pre­cious cheese mar­kets in a neat bal­ance. This lev­ered up far­m­gate prices which have been north of €0.33/litre since late last year. They’re still inch­ing higher and there are few risks of trac­tors rolling into Brus­sels. While the EU Com­mis­sion is sit­ting on a moun­tain of SMP it seems no closer to a so­lu­tion as to what it will ul­ti­mately do with the stocks, and cer­tainly in no hurry to get rid of them. While the pol­icy has made SMP unattrac­tive to pro­duce, it has turned but­ter fat into gold. This has made a mess of a lot of the hard work done by the in­dus­try to build a broader mar­ket in dairy fats, as higher prices have burnt off some de­mand. With gov­ern­ment buy­ing now closed un­til next March, SMP prices have slid fur­ther. This is be­cause the floor in the mar­ket — the gov­ern­ment buy­ing price — has been pulled for 5 months. Sounds like the wool in­dus­try a while back, and we all re­mem­ber how well that turned out The high but­ter prices should melt with more milk in Europe and NZ ar­riv­ing in the com­ing months — but if milk pow­der gets too ugly for man­u­fac­tur­ers, there is also a good ar­gu­ment to say that but­ter may re­main chron­i­cally short into the mid­dle of 2018. Do the EU politi­cians care about the col­lat­eral mar­ket dam­age from their sup­port pol­icy? Nope. The pri­or­ity is peace in dairy agri-pol­i­tics — as­sured for a while given im­proved milk prices and dairy farm mar­gins. Speak­ing of our friends across the ditch, while they are ex­pected to re­bound strongly with good milk prices, more bought-in feed and an in­tact dairy herd, the spring del­uge may limit the growth in milk. It’s dan­ger­ous to “call the sea­son” on the first few months — al­though it may not stop some us­ing that theme to talk up prices. Un­less the pre­dicted warm weather starts to push grass out of the ground a bit faster, the down­side risk in the mar­ket out­look will be gen­tler. But we’re not see­ing any clear rea­son for panic. Things re­mains fairly bal­anced in the big pic­ture and a slide rather than tum­ble in prices lies ahead. An­other cy­cle has come and gone.

While a lot of at­ten­tion here has been given to the re-al­lo­ca­tion of half of MG’s milk amongst its ri­vals, in the back­ground the global dairy mar­ket peaked and is weak­en­ing again.

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