It looks like the cure for low prices, really is low prices. After two years of markets in the doldrums (cushioned by Co-op support in Ireland), and farmers receiving prices well below the cost of production in most countries; the milk supply has finally begun to pull back, and markets are responding. Indications from the UK that the July milk supply was 10% back on the previous year, coupled with reductions of between 1.5% and 4% in substantial producers like Germany, France, Poland and Denmark, prompts suggestions that by year’s end we could European milk supply back by as much as 2%. This is before the Commission’s supply reduction plan to take out 1.1 bn litres (or about 0.6%) takes effect. It is arguable that at this stage, the Commission’s Scheme will have no additional effect on supply, as farmers will simply apply for the scheme in anticipation of a modest already planned reduction, and will hope for the best with regard to any potential payment received.
The fact that butter, quoted at €3342 by Eurex, is almost €900 above its March trough, demonstrates the current heat in butter and cream markets. This clearly demonstrates that developed European and world markets are capable of absorbing our increased production levels, but that buyers take advantage of general market volatility to force down prices.
On the other hand, the ongoing depression in SMP markets, and the slow, if reasonably solid recovery (SMP is quoted at €1770, or around €150 above its March weak point), demonstrates the ongoing weakness in developing economies, driven largely by low oil prices, and weakness in their currencies.
Globally, too, milk supply appears to be responding to weaker markets, with New Zealand milk supply stagnant in June, Australia back almost 9%, The US is up by 1.5% for June, although cumulatively, they are slowing their increase. The fall-off in milk production in Argentina continues, with May supply back 21%.
This all contributes to an ongoing tightening in supplies, demonstrated in the 6.6% increase in the TWI of 2nd August GDT auction. WMP prices were up by an average of 9.9%.
By TJ Flanagan
28 May 2021