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September Dairy Market Update

Headed into holiday season preparation there is very little to celebrate in world dairy markets. One month into Russia’s ban on dairy product imports from Europe, European dairy prices are in a free-fall showing little signs of stopping anytime soon. Last week the European Commission commissioner sent a proposal for a vote before member states and the European Parliament to open Private Storage Assistance (PSA) for butter, skim milk powder (SMP) and cheese. Adding cheese is an unusual request as the commission intended PSA for butter and SMP.

    While PSA may provide temporary relief for manufacturers as they now have a safe-haven for spot product that they have yet to find a new market, it could do little to stabilize the price in the long-term. PSA requires that the product be stored for at least 90 days and no more than 210 days – in exchange, the European Commission reimburses manufacturers for daily storage costs. As a result, European dairy products could return to the market in Q1-Q2 2015 at the same time fresh New Zealand, European and U.S. dairy products are hitting the market. Dairy markets will consider the fact that this product could return to the market place within a matter of months, and likely continue to discount current sales.

    If PSA does little to provide significant relief to European dairy manufacturers a likely next step could be opening Intervention. Similar to the defunct U.S. Support Price Program, under Intervention the European Commission buys butter and SMP from European manufacturers at €2,463.90 and €1,698.00, respectively. Purchases under Intervention would tend to clear markets for a longer period, between 12 to 24 months, and could do more to stabilize the price. Product held in Intervention tends to make its way to donation and aid program eventually and would likely not resurface until market prices are stable and less likely to be affected by this product coming back onto the market. Opening Intervention could be more challenging for European legislators in 2015 as quota ends April 2015. Intervention with no restrictions on milk output could be treacherous political waters to navigate.

    Oceania is reacting to the news out of Europe by adjusting prices lower to remain competitive in overseas markets. As a result, prices on the Global Dairy Trade exchange continue to move lower and anticipate doing so through the end of the year with prices showing signs of stabilizing by Q2 2015. Additionally, both Oceania and European dairy cooperatives have started to signal lower milk prices on the horizon for dairy producers in order to stem milk flows off the farm. Currently, supply is outstripping demand with the Russian ban aggravating an already tenuous situation.

    At the same time, U.S. dairy market prices have shrugged off bearish news from overseas and continue to maintain historically high prices. CME spot butter markets are smashing a 15-year-old record with butter prices within striking distance of $3/lb. Similarly spot cheese markets are maintaining prices well above $2. Nonfat dry milk (NDM) prices are easing down, but CME spot prices are still $1.3375/lb. – higher than current prices quoted from New Zealand and Europe.

    The growing chasm between U.S. and world dairy prices is vexing. However, continued strength in U.S. prices may be starting to show signs of wear. In September, USDA reported U.S. manufacturer stocks of NDM at 250.4 million pounds – the highest on record. While total U.S. stock – including those held by the government – have been higher, these are extremely elevated levels of uncommitted NDM at this point in the year. Seasonally NDM stocks tend to be steady or decline between June and July each year – this year being the exception. Although the United States has maintained higher NDM price levels than other regions, it may be at the cost of lower sales volumes. Should this trend continue into August and September, it could spell trouble for manufacturers as stocks begin to overwhelm the market place. At that point, U.S. manufacturers will have to choose whether to discount product to move it overseas or to maintain prices and likely add to already heady stocks. With milk supply still expanding globally, the later choice could be shortsighted and spell greater product discounts ahead in order to regain a competitive footing in world markets.

    Regional differences manifesting due to short-term supply-demand imbalances frequently happen. That said, the growing chasm between U.S. and global dairy prices suggest tremendous arbitrage opportunities for buyers and foreign sellers. In 2013, the United States exported between 16-17% of total dairy solids. Based on current prices it could be difficult for U.S. dairy to repeat that feat in 2015. As more product stays in the domestic market and likely imports increase for butter and cheese U.S. dairy product prices could be forced to reconcile with world markets. In the end, lower dairy product prices could once again jump start dairy demand overseas which could ultimately stabilize price.

 Sept Chart Pic