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July Dairy Market Update

      For the first half of 2015, the nonfat dry milk (NDM) and skim milk powder (SMP) markets continue a slow slide with occasional moments of support. But recent news of Russia extending the ban on western dairy products through January 2016, Greece potentially leaving the Eurozone and China’s stock market bubble bursting proved entirely too much for the NDM and SMP markets and they collapsed. Currently, the world milk powder producers have sufficient capacity and ability to provide milk for China and Russia – two countries procuring significantly fewer dairy products that just one year ago. Despite solid dairy trade in the first six months of the year, sellers quickly became overwhelmed with current events leading to aggressive trading causing global SMP and NDM price to capitulate. Finding support and bottom has proven to be futile so far this year and may remain elusive as government program designed to stabilize markets may sit idle or no longer exist.

     Just one year ago, dairy producers benefited from record high profits as demand from China and Russia outstripped farms ability to produce sufficient quantities of milk. A year later, world dairy producers ramped up production to meet the new demand only to find that both China and Russia have retreated from milk powder markets. Now, with ample stocks and milk supplies that are still rising, dairy product prices are setting new records – but this time to the low side. On July 10, the CME spot NDM contract settled at 79.50¢ the lowest recorded price since trading began back in 2006. Similarly, at the July 1 Global Dairy Trade (GDT) auction SMP and whole milk powder (WMP) prices fell to $1,875/MT and $2,054, respectively and the lowest price since 2009. Lower nearby prices and poor prospects on the horizon sent sellers to the CME NDM futures market as a haven. By July 10, CME NDM futures were trading below 90¢ for Q3 2015 and below $1 through February 2016. Overall the aggressive trading and price concessions suggests market participants expect these poor conditions to persist through 2016 and that nearby price could fall even further.

     To start July, farmers throughout Europe are calling for the Intervention program to open as the Dutch SMP prices are hovering just 2€ above the Intervention support levels of 1,698€. Irish and Lithuanian farms have been vocal in recent weeks and have started to protest lower dairy product prices. Under Intervention, the European Commission is authorized to purchase 109,000 metric tons (MT) of SMP from member nations between March and August each year. Purchases beyond 109,000 MT are possible under a tender program. Effectively, Intervention artificially tightens the market by keeping product off the market until prices recovery. In order for the Intervention program to open, the SMP price must fall below 1,698€ and remain there for three consecutive weeks. Once the threshold is met the European Commissioner could elect to open the program – but then again he chose to let the program remain idle. The intent of Intervention is to help stabilize markets and support farmers during times of severe market downturns. However, in a Europe operating without Quota, Intervention becomes more challenging as there is no longer a means to control milk production growth.

     Historically, the United States had the Support Price Program that functioned like European Intervention. Under the Support Price Program, the USDA’s Commodity Credit Corporation (CCC) was authorized to purchase NDM from manufacturers that met government specifications at 80¢ per pound. Similar to Intervention, the Support Price was used to steady milk prices to dairy producers during periods of extreme lows by removing product from the commercial market. However, with the new farm bill, the dairy industry opted for the Margin Protection Program in lieu of the Support Price Program. Therefore, without the Support Price Program it is possible the NDM prices could move well below 80¢ per pound – the low of the last two decades.

     Despite widespread clamor from European dairy producers forecasting tough times ahead, few have yet to suffer from prolonged periods of unfavorable margins. U.S. dairy farmers are in a similar situation – predictions suggest lower margins could be on the horizon, but for now dairy producers are still in the black. In fact, most dairy producers saw record high profits during 2014 with the current situation driving lower, but still favorable returns. With Intervention as the only remaining government program available to the world to stabilize prices, all eyes are on whether the program opens soon. Based on communications from the European Commissioner, Intervention may remain closed. It seems, the EU commission is suggesting that dairy producers and manufacturers may have created the current situation and until there is some attempt to slow milk production growth there is little interest to assist with further market stabilization efforts.

     For now, it appears dairy manufacturers and producers could have to rely on rebalancing supply and demand to arrest further price declines. Given the deteriorating situation in the global economy – a rebound in nearby demand seems unlikely. That suggests that lower supply may be the only means of returning equilibrium to milk powder markets. Unfortunately, that medicine is bitter for dairy producers to swallow and likely could take several more months for herd and milk supply contraction to actually begin.