Dairy Markets – Aug ’14

Russian Ban

The UK exports relatively few milk products directly to Russia.  By far the most important category is cheese, but this only amounted to just over £5m in 2013 (less than 1% of all UK cheese exports).  However, Russia is a key destination for milk products from the EU as a whole.  The country took 33% of the EU’s cheese exports in 2013 and 28% of butter according to UN trade figures.  The Russian Federation was also a significant buyer of milk powders.

The countries affected by the ban include the EU, US, Australia, Canada and Norway.  Some major dairy producers such as new Zealand and Argentina are not included.  As the Russian market will still demand milk products, it might be thought that these exempt producers would just switch supplies to Russia, opening up other export opportunities to the likes of the EU – there would be a switch of trade flows, but the total quantity of milk products consumed globally would remain roughly the same, and prices would not be affected.  However, this is unlikely to be the case, at least in the short-term.  Changing trade flows takes time.  In addition, the Russian market may not be that attractive and exporting nations may continue to supply their usual trading partners.  All this means considerable uncertainty in global markets.  EU prices have already come under pressure as Europe is the major Russian supplier.  This is having consequences for the UK price.

Fonterra Price

The latest Fonterra Global dairy Trade (GDT) auction provided some small comfort for dairy producers.  However, it is a comment on the state of the market that a drop in prices was still greeted with some relief, just because it was relatively small.  The sale on the 19^th August saw the weighted average price fall by just 0.6% to exactly $3,000 per tonne.  Beneath this headline figure was a mixed bag of results with butter and whole-milk powder rising, but skim-milk powder and cheese values declining.  Part of the relief was that the fall was so small after a 8.4% decline in the average price in the early-August sale, and against the background of the Russian import ban.  Even so, prices are now 40% down from their February high-point.

UK Prices and Production

Some major UK processors have announced further price cuts.  Arla is to reduce its standard AMCO co-op price by 1.2ppl from the 1^st September, taking it down to 30.4ppl.  First Milk is also cutting prices from the start of the month.  Its liquid price will fall by 0.65ppl to 27.9ppl (this price has now fallen 4.4ppl since June).  The company’s manufacturing price will reduce by 0.5ppl to 28.8ppl.  Dairy Crest’s formula price will decrease by a small 0.053ppl to 31.9ppl.

Despite falling prices, production continues to be strong in the UK.  Figures from DairyCo shows that UK output in the fortnight ending the 16th August were 6.8% higher than the same period in 2013.