DairyCo

EU Market Balances

Published 25 August 10

EU-27 Market Balances

• World milk supply growth is expected to be limited in the first three quarters of 2010 whilst world milk demand is expected to remain high in 2010 - significant increases in supplies are expected in the Southern Hemisphere 2010-11.
• Whilst production of cheese and fermented products is expected to recover in 2010, the EU situation for SMP is more uncertain, market shortages and rising prices are likely to result in at least 65,000 tonnes of SMP moving out of intervention stores in 2010.

Note: The balance of supply and demand in the main dairy product markets in the EU is a major determinant of price trends for those products, and these balances are therefore an important aspect of looking at future prospects for milk producers and for buyers of milk and dairy products. Unfortunately, the calculation of those balances is subjective and very dependent on the assumptions made concerning world market demand and production of all main dairy products, supply and demand within the EU and imports and exports of those dairy products. Small changes in supply and demand can have very large impacts upon the balances in this report. Not surprisingly, different market commentators have differing views about these various factors. So the information in this report may change from time to time and may differ from other sources.

World commodity markets remain highly volatile, and benefited in the second half of 2009 from high demand from China as a result of the Melamine scandal, coupled with little or negative growth in milk supplies from Oceania, the EU and the US. World milk supply growth is expected to be limited in the first three quarters of 2010 and provided economic growth does not falter, world demand could remain high in 2010. However, there is expected to be a significant increase in supplies in the Southern Hemisphere in the 2010-11 season. Long term, the rate of increase in demand is expected be higher than the increase in supply, driven by economic growth in Asia.

The EU market situation has been more balanced in 2010 than in 2009, and has looked increasingly more positive over the past few months. Producer prices are showing some recovery from 2009 and beginning to stimulate some increase in milk production. Milk deliveries at the start of 2010 were 1-2% below year earlier levels, but rebounded in May. Provided economic growth continues, cheese and fermented product demand is expected to recover, potentially reducing production of butter and SMP. With the availability of product from the southern hemisphere limited, EU exports are expected to grow.

Currently, world market prices for butter are above EU intervention prices.  It seems likely that EU butter prices will remain above intervention levels and if exports grow in the way shown in the table below, then the butter market will be at least balanced and show excess demand over supply.  This will be met in part from intervention stocks (some 50,000 tonnes are already set aside under the 'deprived persons' scheme, which itself is expected to produce some increase in demand) and by the sale by tender of the remaining 25,000 tonnes of intervention stocks.

The EU situation for SMP is more uncertain. So far in 2010, falling production and rising exports have created market shortages and rising prices. However, there are 192,000 tonnes of SMP stock in intervention stores that are overhanging the market.  Politically, the Commission found it difficult to release these stocks during 2009 when EU milk producer incomes were so low. It has now begun to operate tenders for the sale of intervention SMP beginning in June 2010, but it has so far rejected all tenders.  Some 65,000 tonnes have also been set aside for the 'deprived persons' scheme and this amount will enter the EU domestic market in 2010. Effectively the release of intervention stocks would prevent prices rising further. So much depends on the balance of supply and demand in the world market and the opportunities for export for EU manufacturers.  In the table below, it has been assumed that EU domestic demand rises in 2010, helped by the 'deprived persons' scheme.  EU exports are also forecast to rise, by 70,000 tonnes, and world demand could result in even higher exports.  The net result of these changes is that at least 65,000 tonnes of SMP will leave intervention stores in 2010.

 Please note: The 2008 figures contain estimates and the 2009 and 2010 figures are preliminary forecasts: all figures in the table are subject to change.

* Contains estimates
** Forecasts
*** Includes Processed cheese,
Data includes estimates of farm production
SMP data includes buttermilk powder
Source: Eurostat, DIN Consultancy

EU Commission Forecast

The EU Commission's latest medium term forecasts (March 2009) up to 2015 are considerably more pessimistic than previous forecasts as the impact of lower economic growth affects demand for value added products and export competition intensifies, while quota increases produce increases in milk supplies. Milk prices are expected to remain considerably below the exceptionally high 2008 level right up to 2015, resulting in only a modest increase of milk deliveries of just over 2% by 2015, and milk supplies will continue to be significantly below quota. However, cheese and value added products output are predicted to continue to grow, with cheese output up by 11% by 2015, reducing butter and SMP output by around 10%, faster than the predicted change in EU consumption. EU butter consumption is predicted to decline only marginally by 2015, while EU SMP consumption is expected to grow. Despite this, the low demand for EU butter and SMP exports reflecting competition from lower cost exporters is expected to mean that it will not be until 2012 that intervention stocks of butter disappear but in 2015 SMP intervention stocks will still overhang the market. While intervention stocks remain, commodity prices are likely to stay near intervention, with the surpluses more evident for protein than for butterfat. The Commission put EU exports of butter down to only 28,000t in 2015 (compared to 140,000t in 2008), but SMP exports are expected to reach 101,000t, only 40% down on the 2008 figure. Cheese exports are expected to fall only slowly.

The abolition of quotas in 2015, according to the Commission, would not have a significant impact on milk production or milk prices, with supplies up by only 1% and milk prices down by a miniscule 0.1%.