Summary
EU SMP exports reached record levels despite declining prices in 2017, while the EU is committed to eliminating SMP intervention stocks in an orderly fashion, discounts have to be offered to encourage purchases. This exerts further downward pressures on SMP prices. No sustained recovery in SMP prices is likely as long as EU public intervention stocks overhang the market. Low SMP prices are a particular source of concern for African ACP countries, since imported milk powder prices provide a bench mark for local milk prices, undermining efforts to develop local milk-to-dairy supply chains in African regions targeted by EU exporters. Trends in EU SMP exports highlight just how divorced EU export patterns can be from underling price trends and the extent to which EU policy measures drive trade flows. Whether the profound effects EU policies have on the functioning of milk powder markets can be mitigated in ways which create new opportunities for the structural development of dairy production in ACP countries remains to be seen.
In 2017 the value of EU dairy exports grew 14% in 2017, with EU exports of cheese and SMP hitting record volume levels. Indeed, in 2017 EU SMP exports rose 35.7% year on year and were fully 34.2% above the four year average (1). This expansion in EU SMP exports continued into 2018, with export volumes up 8% from January to April 2018 compared to corresponding levels in 2017 (2). This occurred on the back of a 6% expansion of EU SMP production in the corresponding period (6).
This dramatic increase in EU SMP exports occurred, despite the lower prices being offered for EU SMP (3). EU SMP prices fell 22.7% from the first quarter of 2017 to the final quarter of 2017. This was matched by a similar trend in US SMP prices (down 20.1% from QI to Q4 2017) and Oceania SMP prices (down 23.8% from Q1 to Q4 2017).
As 2018 has progressed prices of most dairy product recovered with particularly high butter prices. The notable exception to this trend were skimmed milk powder (SMP) prices, which have continued to decline losing 8% in 2018 by the end of March (1).
Skimmed Milk Powder Prices (Quarterly historic, estimate and forecast)
| 2017 | 2018 | 2019 | |||||||||
| Q1 | Q2 | Q3 | Q4 | Q1e | Q2f | Q3f | Q4f | Q1f | Q2f | ||
| EU (€/t) | 1,985 | 1,844 | 1,772 | 1,534 | 1,376 | 1,455 | 1,635 | 1,680 | 1,670 | 1,660 | |
| USA ($/t) | 2,105 | 1,927 | 1,927 | 1,682 | 1,544 | 1,721 | 1,918 | 1,984 | 2,040 | 2,095 | |
| Oceania ($/t) | 2,419 | 2,013 | 2,000 | 1,843 | 1,882 | 1,950 | 2,050 | 2,050 | 2,050 | 2,100 | |
Source: Rabobank
In its second quarter review of global dairy market developments Rabobank has highlighted how ‘the European Commission has made some inroads towards liquidating intervention skim milk powder stocks’, but with EU origin SMP continuing ‘to trade at a discount compared to most regions’. This situation, it is held, is likely to continue ‘as long as intervention volumes remain burdensome’ (2).
By the end of May 2018 EU public intervention SMP stocks were put at 342,791 tonnes, with stocks held under aid to private storage schemes having been eliminated by the end of March 2018 (4).
The EC is looking to continue to run down its SMP stocks with 145,000 tonnes scheduled to be offered for sale in June in the expectation of a solid response from industrial users. This it is hoped would then assist in halving EU public intervention stocks of SMP over the course of 2018. It is felt that low private stock levels of SMP could well support these EC purchase expectations (3).
However previous tender offers in February 2018 proved disappointing with only 4,000 tonnes of the 99,000 offered for sale having been purchased at prices 7.6% below the previous tender price (5). Later tenders achieved more success but still only reduced overall stock levels by 9.1% or some 34,384 tonnes.
Evolution EU SMP Stocks in 2018
| January | February | March | April | May | June | |
| Beginning month | 378 051 | 377,175 | 375,699 | 371,849 | 367,279 | – |
| In | 0 | 0 | 0 | 0 | 0 | – |
| Out | 877 | 1,475 | 3,850 | 4,570 | 24,489 | – |
| End of Month | 377 175 | 375,699 | 371,849 | 367,279 | 342,791 | – |
At the end of April 2018 average EU SMP prices were 10.5% below the indicative intervention price (€152 per tonne compared to €169.8 per tonne). In some EU member states prices were even more depressed, being 21.1% below the intervention price in Poland and 18.3% in Ireland (6). These low price levels had not been seen since 2007, although prices recovered marginally in the following two months (3).
Copa-Cogeca has expressed concern over the ‘fragile’ market for skimmed milk powders with ‘prices at around 20% less than levels seen last year’ (2017), and has cautioned the European Commission to be careful in its SMP disposal programme so as to ‘avoid creating a crisis situation’. (7).
More optimistically, Rabobank see’s EU SMP price bottoming out in the first quarter of 2018, with a halting recovery in EU prices up to the second quarter of 2019. In the second quarter of 2018 EU SMP are foreseen as being discounted 12.7% compared to Oceania prices. By the second quarter of 2019 the EU SMP price discount will have narrowed with Oceania to around 7.6% discount.
Overall, according to the report of the 25th Meeting of the MMO Economic Board, ‘EU milk deliveries increased in 2017 by 1.8% (+2.7 million t)’, with production continuing to grow into 2018. However in January 2018 ‘average EU farm gate milk prices dropped significantly’ (-4.7%), although they remained above both the average for 2017 and the five year average. EU milk collection is expected to increase 1.4% in 2018, with most of this growth taking place in the first half of the year. Significantly, once again the EU MMO Economic Board observed across the dairy sector ‘supply currently outpaces demand’ with ‘an adjustment of milk production in the EU required’ (1).
| Comment and Analysis The concerns arising from the downward pressure accumulated EU SMP stocks exert on global SMP prices are currently being compounded by the price discounts needing to be offered to clear the EU’s ageing stock of SMP still held in public intervention. Milk powder price trends are a particular source of concern for African ACP countries, since imported milk powder prices provide a bench mark for local milk prices.Given the product innovations underway since 2013 designed to expand the range of bespoke milk powder products which can be made available to dairy processors and other dairy product food industry users, sustained levels of low SMP prices has transformed the economic context within which African governments has sought to expand domestic milk production. A range of low cost dairy products targeting mass consumption markets can now be produced more efficiently using imported milk powders than locally sourced milk, with these ranging from consumer ready sachets of powder which can be reconstituted in the home, through long life milk to yoghurts. While this is expanding dairy manufacturing activities in Africa, it is doing so in ways which are disarticulated from local milk production, with limited employment creation and few rural development benefits stemming from this pattern of dairy sector development. In some regions such as West Africa this represents lost opportunities for job creation and rural development. For example, the latest investment by the pan-European dairy company Arla in Ghana (9) will create the grand total of 8 jobs while allowing the distribution of 55,000,000 litres of milk in the form of powder sachets. If this same volume of milk were to be supplied by the new medium sized feed based dairy farms which the government of Ghana has been seeking to promote then demand could be created for milk from producers managing almost 19,000 cattle in the context of an average herd size of 100. Replacing such milk powder repackaging activities by local milk production could create increased incomes for 190 new commercial cattle farmers, not to mention employment along associated supply and distribution chains. While this is illustrative of a foregone potential growth it does need to be situated in the context of the multiple structural difficulties faced in creating efficient integrated milk-to-dairy supply chains in West African. In other regions such as East Africa where EU milk powder exports have recently been initiated it potentially poses a threat to long established systems of small holder based dairy sector development, as new EU joint ventures see opportunities for the expansion of mass market dairy production based on extremely cheap imported milk powders accumulated under private storage and public intervention buying schemes in the EU. In still other regions such as Southern Africa, evolving patterns of regional trade in dairy products are seeing imported milk powders used to produce cheap mass market dairy products distributed across the region in ways which pose challenges to the development of local milk production and dairy processing in smaller neighbouring economies. It is difficult to see how this challenge can be addressed given how the sustained low levels of SMP prices have so fundamentally transformed the economics of local milk production as to appear the natural working of market forces. However it needs to be recognized these ‘market forces’ have been largely policy driven since the EU’s 2009 decision, to lift the 110,000 tonne ceiling on skimmed milk powder intervention buying in response to the EU’s own milk market price crisis. This policy of abandoning any ceiling of purchases into public intervention stocks has been repeatedly confirmed over the past nine years (8). While the EC is committed to eventually returning to moderate levels of intervention buying and the use of intervention as a purely emergency crisis measure, for nearly a decade now intervention buying has been a structural feature of EU dairy sector policy. This has enabled the EC to keep the underlying dairy sector reform process on track, despite high levels of price volatility on EU and global dairy markets. It remains to be seen whether the technical innovations EU dairy companies have been introducing and patterns of EU corporate investment to develop new markets for consumer ready milk powder based dairy products across Africa will eventually create a new equilibrium for the EU milk powder sector. A new equilibrium which will see dairy processing activities in a range of African countries firmly integrated into EU sources of inputs (e.g. bespoke milk powder imports). |
Sources:
(1) EC, MMO Economic Board’, 27 March 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/reports/2018-03-27-report_en.pdf
(2) EC, Agridashboard: dairy products’, 20 June 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/dashboard-dairy_en.pdf
(3) Rabobank, ‘Dairy Quarterly Q2 2018: Steady as She Goes…For Now’, June 2018
https://www.dairybusiness.com/rabobank-global-dairy-quarterly-q2-2018-steady-as-she-goes-for-now/
(4) EC, ‘EU TOTAL S.M.P. STOCKS EVOLUTIONS IN 2018’
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/eu-stocks-butter-smp_en.pdf
(5) Farm Ireland, ‘EU sells just 4,000t of intervention milk powder stocks, out of 99,000t offered – sources’, 22 February 2018
https://www.independent.ie/business/farming/dairy/eu-sells-just-4000t-of-intervention-milk-powder-stocks-out-of-99000t-offered-sources-36632931.html
(6) EC, ‘Milk Market Situation’, Brussels, 21 June 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/market-situation-slides_en.pdf
(7) Copa-Cogeca, ‘World milk day: Copa and Cogeca highlight improved market situation’, 31 May 2018
http://www.copa-cogeca.be/Main.aspx?page=Archive
(8) EC, ‘SMP Intervention ceiling formally raised’, 30 June 2016
https://ec.europa.eu/ireland/news/Increase-in-intervention-ceiling-for-milk-powder_en
(9) Arla, ‘Launch of new business in Ghana’, 30 August 2017
https://www.arla.com/company/news-and-press/2017/pressrelease/launch-of-new-business-in-ghana-2126045/