Milk Powder
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Milk powder price rise in 2009
Impact of recession would be perfectly right for Milk powders/ Dairy commodities if were discussing this topic before July 2009 where we saw prices slump to all time lows of 1700USD/mt for Skim milk powder after hitting to highs of 5000USD/mt in 2006. But from past 2 months the situation has rapidly changed. As you will notice that last 2 months, prices have increased heavily for all dairy commodities.
It all started with the Fonterra auction during August first week, were prices increased with 25% on average for Full cream milk powder. The market remained quiet until this time with flat pattern, and companies did not expect prices to increase further, so bookings were very flat. However, September tender has still shot up 25% on prices & made people realize that prices are changing with upward trend. Ofcoarse Fonterra does not dictate the market for 100%, but it has given the worldmarket a push upwards ( which was needed as it was not feasible for farmers globally to sell milk at such low levels when the costing for feed has changed a lot ).
Few reasons why prices have increased:
- Bad start of season in Australia / New Zealand. Milk intake has been bad so far than projected, factories have oversold themselves. Any ? free ? volumes are not available anymore until December / January. Many contracts have been cancelled due to shortage as factories have sold volumes on projections. As you are aware that oceania contributes the major export volumes for international dairy commodity market.
- Factories / companies are very short covered, due to low prices from last 7-8 months and the downward pressure, nobody dared to buy big volumes ahead. Now most companies realize they have to buy and a sudden demand pull situation has arised at once, which is driving the market.
- China & far east is completely empty. In China there is 25% less milk available, which is a huge amount for the nr 6th milk producing country to suck volumes. In addition to that they have lost much of the reputation on export market worlwide due to Melamine issue last year, where in chinese dairy commodities & derived products are banned in many countries
- Europe is going towards the lowest production season of the year ( September / October ). I strongly feel that that the European dairy commission will cut the subsidies in Europe and intervention levels will be revised. Subsidies are there to support the farmers if milkprices are very low. As prices have increased a lot, the chance is big that they will be brought down during the next meeting, which is next Thursday. This will create a further price rise as its the only market now which can support this demand and factories will utilize this oppurtunity.
- India as a huge producer of milk, was never a major exporting country, yes we had a chance in 2006 & 2007 when prices have crossed 3000USD/mt levels in international market which was lucarative for Indian manufacturers at that time where in we realised some foreign exchange on limping US dollar. But now internal demand is so high that even the domestic demand is not fullfilled to the fullest as we forsee drought in many parts. Many cows have made its way to abbatoirs this year fearing drought.
- Now manufacturers in India realise that the domestic prices are far higher than International market, so this year India has imported substantial quantities of Dairy fat & Lactose. Mostly AMF for converting into Ghee & lactose for pharma & food applications. I also added huge volumes this year for Indian imports next to Fonterra. NDDB/ Mother dairy might import 10000Mt of Skim milk powder this year, which is creating a panic in Domestic market. This year India has to look into imports to sustain Internal demand. Most of the Ghee Indian people have been eating from January this year is not from Milk of Indian cows/ Buffalos, but the Ghee which has been converted from AMF which has been imported from Oceania (Aus/ NZL).
- Ukraine/ East european countries have slaughtered many cows this year and last year, milk supply is limited and export of powders from Ukraine is 40% ( ! ) less then other years. Almost all Ukraine factories have stopped producing at the beginning of September due to end of their season.Very low fat % in the fresh milk, which mainly causes a huge increase for butter and AMF
- There is some volumes coming out of Latin America, especially from Uruguay & Argentina but the voulmes are very low. Brazil is importing this year, where in it was a exporter in 2006 & 2007.
- In Noth America, especially there was a huge stock pile of Cheese & whey powders till July. Which has triggered US govt to back up with DIEP subsidies. But off late in September we realised that the DIEP approvals were slowly being made tightened with coverage not exceeding 60% of quota limits for all major exporters like Fonterra, Interfood, Hoogwegt & James Farell etc. Many farmers have sent cows to slaughter houses this year due to credit crunch & low milk prices which was adding heavy pressure on their pockets
- USA has always been exporter of Cheese, whey products and its derivatives in international market, nothing much has been contributed in regular milk powder export volume. If you see exports this year from DFA (though controlled by Fonterra), Dairy america, Interfood, DAVISCO, Dairy Gold etc its mostly concentrated to Korea & Far east markets especially for cheese and allied products. Nothing much has been done in powders or AMF. But I feel that the DIEP subsidies will be revised in the coming months if the price rally continues as this was carried in to help producers.
Looking at the above facts, combining with other macro economics, i expect prices to firm further until next season. Mainly SMP has to increase, as the gap between SMP & FCMP is approx USD 600 / MT, which is too big. I feel that supply is limited from all sources and thus a further increase for SMP is more likely than a decrease of FCMP or FAT.
About the Author
1. Holds Masters degrees in Food Technology & Business Management
2. Bachelors in Agriculture, with a University Gold Medal
3. Presently working as General Manager, for an MNC overseas travelling accross the world and having an insight view on global issues.
4. Apssionate on keeping a personal track on National & International issues specific to Politics, Security, Trade, Food, Agriculture, commodities etc
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