Dairy Market Report

10th September, 2014

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Global milk supplies still growing

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Tables and graphs - percentagePeriod

NZ 16.29% Jan to Jun 14USA 1.90% Jan to Jul 14EU28 5.18% Jan to Jun 14OZ 4.55% Jan to Jul 14

16.29%

1.90%

5.18%4.55%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

NZ USA EU28 OZ

Evolution of Milk Supplies Jan - Jun/Jul 14

Source: IFA based on DairyCo compiled data from various sources

In percentages

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Tables and graphs - absolute quantities12/13 13/14 Period

NZ 6,975 8,111 Jan to Jun 14USA 52,500 53,500 Jan to Jul 14EU28 73,444 77,252 Jan to Jun 14OZ 4,488 4,692 Jan to Jul 14

6,975

52,500

73,444

4,4888,111

53,500

77,252

4,692

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

NZ USA EU28 OZ

Mill

ion

Litr

es

Milk Supplies in Main Producing RegionsJan-Jun/Jul 14 v 13 (million litres)

12/13

13/14

Source: IFA based on DairyCo compiled data from various sources

In million litres

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EU PRODUCTION UP 5.1% JAN/JUN 2014, AND 5% APR/JUN 2014

Source: IDB

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IRISH MILK SUPPLIES UP 5.8% JULY, 7.1% JANUARY/JULY 2014

Source: CSO

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Outlook for global milk supplies• EU: Volumes are up on last year’s already growing levels, but may fall due to

superlevy in main regions and falling prices

• UK: Prices falling fast, volumes to date remain v strong due lower costs. But farmers expected to cut back on feed inputs

• US: Could increase 2nd half by 4% due higher cow numbers, low costs and high milk prices (Class III up 36% year on year). Record corn harvest forecast, 30-year high stocks, 4 year low corn price. US in expansion mode.

• NZ: Good start to season. Jun-Sept estimated up 4%. Farmers feeding less due price expectations. Milk price could fall to 5.25NZ$ per Kg = 24cpl ROI milk eqv.

• EL Nino likelihood downgraded from 90% to 50%. Limited impact in India, Australia or NZ. California drought concerns persist but impact is more medium/long term

• Summary: In the absence of an adverse weather event, milk price decreases will be required to limit production. Quota concerns may lessen output in short term

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Dairy markets: supply/demand imbalance exacerbated by Russian Ban

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Markets - Global• Supply/demand imbalance since late 13/early 14• Global production rising 4.9% p.a., healthy growing

demand rising only by 2.5%• China overbought expensive stock in 2013, and domestic

supplies recovering – now temporarily out of market till stocks used up. Return of China to market is crucial (when, not if)

• Russian ban impacting Europe and world• GDT auctions – avg price down 44.7% since Feb peak• What can rebalance supplies?

• Prices still relatively strong, feed costs low. Weather event? El Nino likelihood now down to 50%

• ON THE POSITIVE SIDE• Lower prices bring back African and some SE Asian

customers• Demand outlook remains strong – unlike in 2009• Markets will rebalance in coming months as buyers

need to return to markets.

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Source: GDT

GDT AUCTION DOWNWARD TREND CONTINUES

Weighted avg price for GDT

traded commodities down 44.7%

since Feb

-6%

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Markets EU • Strong production growth in EU - +5% for Jan/Jun • EU commodity prices had held up better than global prices,

but had been easing since January.• Now reducing more rapidly with influence of the Russian

ban• Falling prices -> reports of delay and default for agreed

contracts.• Gross returns for all of August were around 38-40c/l –

about justifying current (July) milk prices, which we estimate to average at 33.5c/l + VAT (35.17c/l incl. VAT)

• Now well off-peak – some pulling back to avoid superlevy expected in the main dairy countries – should contribute to rebalancing supplies.

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Source of base data: EU Commission MMO

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Products news - 1• Cheese – fallout from Russian ban, sentiment negative

• EU – Edam/Gouda milk going to powders. Buyers back from hols but still quiet. APS measures may ease negative impact of Russian ban somewhat. Some 3rd co export opportunities may appear, in competition with NZ

• UK cheddar – some interest from buyers, but high stocks rumoured, and retail demand -2.5%

• NZ ->more milk going to cheese due GDT pwrd price fall?• US -> domestic demand and CME prices v high, but prices and exch

rate restricting exports.

• SMP• EU –APS may attract milk to pwdr, sufficient drying capacity. Some

reported increased buyer interest.• Algerian tender 1st Sep – unclear what impact on EU pwdr mkts.• US exports too dear, possible opportunity for EU product on export• Some renewed buyers’ activity, but at relatively low prices

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Product news - 2• WMP

• EU -> high stocks, lowest returns for milk. Reported defaulting on contracts. Production falling to cover only firm orders.

• NZ+Oz -> much increased production, reflected in GDT volumes• Algerian tender -> could benefit NZ and S Am exporters• S Am -> milk diverted to cheese and butter for Russia• WMP prices reliant on Chinese demand and GDT outturn -> hence

poor at the moment. However could it be first product to recover, having been first to fall?

• Demand from China and Algeria critical to fate of market and prices.• Butter

• EU -> production remains strong due to milk volume and poorer alternatives. Likely to continue due to diversion out of cheese (Russia). Russian ban has had big price impact: -20% since its announcement. APS now open should take product off market temporarily. Futures markets suggest weak prices to year end, but strong demand remains, so sellers are not committing long term at current prices.

• US -> Very high butter prices unsustainable – futures for year end 40% down. Export demand declining due prices and $.

• Stocks building in EU and Oceania• Demand remains strong, stimulated by lower prices – but outstripped

by supplies in EU

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THE RUSSIAN BAN ON EU FOOD IMPORTS• In response to EU and US sanctions re. Ukraine crisis.• 1/3 of EU cheese and butter exports going to Russia,

though total EU exports to R only 1.5% of EU milk production

• Negative sentiment in already imbalanced market• Some countries directly hit: Baltic states, Finland, Poland• Rest -> some signif. Exports (NL, DE, DK…) and other

countries just collateral damage (Ireland included).• Some milk coming back into powder/butter• Commodity prices have fallen faster• EU response:

• Immediate €120m to fruit/veg growers in S Europe• APS extended to commodity cheeses (155,000t for 7

months) as well as SMP/butter (no limits) – applicable immediately.

• Extension to dairy intervention buying in to year end• Promotion funds and targeted payments (no details)

• Impact: Food inflation rising in Russia, alternative sources diff to find (political pressures), Public support for Putin

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EU EXPORTS TO RUSSIA ONLY ACCOUNT FOR 1.5% OF EU PRODUCTION

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BUT ACCOUNT FOR APPROX 1/3 OF EU BUTTER AND CHEESE EXPORTS

Source: EU Commission

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EU CRISIS SUPPORT MEASURES• APS opened for bulk cheeses, SMP and butter since 5th

Sept. 155,000t max of cheese for up to 7 mths. Product being taken out of market and storage subsidised. Should impact market, but could take some time to show.

• Intervention buy in period extended from late Sept to end of year – but no action on price level. This may help some Baltic states (?)

• Additional promotional funding on EU and export markets: €30m from EU funds to be cofinanced up to the same again from national budgets. Available from 2015. Little detail available on this more medium term measure.

• Some talk of direct financial payment targeted to certain farmers (?)

• EU Commissioner has clearly stated more emergency measures could be forthcoming if necessary

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Milk prices: still strong globally, but falling very rapidly in some countries

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MILK PRICE – EU ROUND-UP• This is based on info contributed orally by our European

colleagues in a round-table discussion in Brussels on 2nd Sept.

• Prices quoted are most recent available, not yet captured by official stats. In many cases, those are a month or two ahead of what would be available in Ireland (uniquely, we set our price retrospectively).

• Beware: prices are for different specs! • Most are for over 4% fat and over 3.7% protein, so

would be quite a bit lower expressed at 3.3% p 3.6%f.• However, they are not directly comparable, as none of

the conditions were clarified by the contributors – this being an informal exchange of information.

• Most measure prices in c/kg of raw milk (not of milk solids).

• 1 litre of milk weighs on average 1.03 kgs.• So, 35c/kg = 33.98c/litre

21Country c/l or c/kg Month Down from (peak price this year)

Belgium 36c/kg July 42c/kg in Jan

Hungary 32.1c/kg July Not stated

Estonia 21c/kg25-26c/kg

AugSept

32c/kg in Jul

Germany 37c/kg35c/kg

AugSept

42c/kg Nov 13

Lithuania 21c/kg Aug 33c/kg in Jul

Latvia 24c/kg20-21c/kg (?)

AugSept

34.2c/kg in May

UK 36c/kg, 1 buyer to pay 32c/kg Oct Not stated

Denmark 36c/kg Sept 42c/kg in Apr

Sweden 35.5c/kg Aug 45c/kg in Apr

Finland 39c/l (NB Valio’s mb co-ops likely to pay 41c/l)

Aug 45c/kg in Jun, higher before.

Poland 32c/kg Aug (?) Price down 15% this yr

Italy 35-37c/l Aug 43-44c/l Spring

Spain 33.5c/l Aug 6-8% fall from prev. quarter

Austria 38-39c/kg Aug 42c/kg April

France 39c/l Aug Not stated

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VOLATILITY THE NEW REALITY, BUT RISING UNDERLYING TREND SINCE 07

Source: EU Commission

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Source: Based on LTO data

Price for July 2014

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Irish milk prices – outlook?

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IDB INDEX DOWN 3.3PTS TO 114.8 – EQUIV TO 33.6C/L + VAT

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Net possible price from above, after

processing costs of 5c/l = 32.94c/l

EU avg dairy prices 31/08/14

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Irish Milk Prices ? • July estimated average: 33.5 + VAT = 35.17c/l incl VAT.• August –>

• Town of Monaghan down 1.5c/l to 32.4c/l + VAT ( 34c/l incl VAT)

• GIIL down 2c/l to 31.42c/l + VAT (33c/l incl VAT), but 2c/l offset for Aug milk from Milk Price Stability Fund*

• No other as we write• Outlook? Seasonality of supplies should minimise further

market hits during trough months. • Would expect limited adjustments – especially if market

uncertainty eases and buyer activity increases.

*MPSF established earlier this year from profits accumulated in 2013 not passed back to farmers in real time. Total €5m.