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Price Developments
Summary:
Recent trends in dairy prices have been heavily influenced by the rapid and seemingly unstoppable climb in the value of the dollar. Rising by nearly 20 percent against major European currencies since the start of 1997, the impact has been particularly evident on export prices of milk powder. Currently, prices for NDM are $300 below early 1997, when NDM prices were trading in the $1,900 to $2,000/ton (FOB basis) range. In contrast, international prices for EU butterfat have been surprisingly firm, largely due to limited supplies as EU domestic consumption remains strong. Cheese also appears to have established a firm level at prices above $2,100/ton. Consequently, the outlook for the remainder of 1997 for international dairy product prices remains mixed with prices for powder likely to weaken further as the dollar gains strength. At the same time, prices for cheese and to lesser extent butterfat appear fairly resilient and will likely remain at current levels.
Non Fat Dry Milk:
The rising value of the dollar and sluggish world demand have combined to depress NDM prices by some $300/ton since early 1997. End-of-July prices are in the $1,600-$1,700/ range (basis FOB EU ports). The outlook for the rest of this year remains dim as major buyers appear to have adequate stocks and purchases for the October-December quarter are nearly complete. Mexico, a major importer of NDM, is currently in the process of purchasing some 10,000-12,000 MT of Canadian and U.S. powder for delivery in the last quarter of the year according to trade sources. However, this will likely complete their purchases for the year. Mexico's next round of purchases for early 1998 delivery will probably start later in the fall. Algeria, also a key importer, has not expressed a strong interest in purchasing any substantial volumes from the United States. Algeria currently seems to be well supplied with powder from Poland. During the remaining months of 1997, Asian demand will probably remain questionable as a number of Asian currencies are under pressure, raising the cost of all imports. Add in the reluctance of the EU commission to reduce subsidy rebates in the face of the strengthening dollar and it is easy to conclude that the stage is set for further price declines. Pressure on late 1997 markets will further increase as the pace of production starts picking up in Australia and New Zealand.
Several factors could alter that scenario. Clearly, the value of the dollar will be a key determinant. Any reverse in the current upward trend will have the immediate effect of raising EU prices and hence world prices. A second factor which could push up prices is the El Nino phenomenon which tends to have a profound effect on global weather. One usual El Nino effect is to induce dry conditions in Australia and to a lesser extent New Zealand. Though it is somewhat premature, there are already signs that rainfall in Victoria, Australia's principal dairy state, is running well below normal.
A third, but probably less significant factor, is the impact of floods in Poland. The recent floods in Poland may reduce the availability of Polish NDM and force exporters to cover their sales from other origins. This could generate additional international demand.
Butter:
The outlook for world market prices of butterfat points to a well balanced market with stable to firm prices. The reasons are twofold. First the EU, as a principal supplier to world markets has recently reduced exports of butter to a virtual trickle reflecting the low availability of exportable supplies. Stocks of butter under the private storage scheme are well below previous year's levels underscoring the limited availability (see chart). In fact, domestic butter demand has been sufficiently robust that there have been petitions for the EU to release intervention stocks just to stabilize internal prices. The second factor has been the re-emergence of Russia as a major purchaser of butter. Some traders estimate that over 200,000 tons of butter have been shipped to Russia since late 1996. The EU and New Zealand have been the major suppliers. While the pace of Russian purchases has declined somewhat, recent U.S. sales suggest that buying interest remains strong. Given the limited availability of product in the EU, world butter prices could rapidly escalate, especially if Russia follows the same purchasing pattern as last year. Quoted EU butter prices are currently in the $1,700-$1,750/ton (FOB basis) range. Prices for butteroil, reported to be in short supply, are just above $1,900/ton (FOB basis) level.
Any substantial increase in global demand would likely benefit Oceania suppliers, since the United States is usually not in a position to supply substantial volumes during the fall season when milk production declines. Oceania prices are being quoted in $1,400-$1,500/ton range, although quantities for immediate delivery will remain limited until production starts rising seasonally in late August.
Cheese:
International prices for Cheddar cheese have been fairly stable largely as a result of steady import demand and a decline in supplies from the EU. Under Uruguay Round export subsidy disciplines, the EU is only permitted to subsidize the export of 384,400 of cheese in 1997/98 (Jul/Jun) - down 21,000 tons from 1996/97. Current international prices are in the $2,100/ton to $2,500/ton (FOB basis) range. Cheese from Oceania makes up the lower end of the price spectrum while EU export prices make up the top end. Australia and New Zealand have maintained relatively low prices, despite the reduction in EU competition in order to move the extra cheese resulting from the excellent milk production season. For the remainder of 1997, it seems likely that irrespective of EU price levels, Oceania will continue to maintain cheese prices at competitive levels in an effort to maintain growth in exports.
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