Weak European prices are colliding with the end of the continent’s 31-year milk quota system.
While U.S. Cheddar cheese and butter prices have been trending higher, EU prices have been softening, cutting deeper into the competitiveness of U.S. dairy products. Weak European prices are colliding with the end of the continent’s 31-year milk quota system.
“In the last seven weeks, butter prices have fallen €400 per metric ton in the Netherlands and €350 in Germany,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “Over the same period, the U.S. dollar has lost ground against the euro, which is dulling the impact that the decline in foreign butter prices is having on domestic butter prices.”
The spread between CME spot butter prices and the European market has widened from about 10 cents in mid-March to 38 cents as of last week, after adjusting for currency and butterfat differences, notes Sharp.
“Last fall, when U.S. supplies were scarce, U.S. butter and Cheddar markets demonstrated their ability to ignore declining prices overseas,” says Sharp. “But in the midst of this year’s formidable spring flush in much of the country, U.S. markets are less likely to remain immune to pressure from overseas. Today’s growing premiums on U.S. products have created the potential for lower prices abroad to weigh on local markets.”
Despite the elimination of the EU milk quota system in early April, milk production in Europe has been declining. Milk output in the 28 nations of the Eurozone was 11.28 million metric tons, or 24.9 billion pounds, in February, down 1.3 percent from February 2014.
“February’s decline in EU production was the largest year-over-year contraction in European milk output since April 2013,” notes Sharp. “However, given poor milk margins and the threat of super-levy quota penalties in a number of key milk-producing nations, February’s decline was likely smaller than many anticipated.”
First-half 2014 production in Europe is also being compared to exceptionally strong 2014 levels. “In the first six months of 2014, production exceeded 2013 output by more than 5 percent,” notes Sharp. “European dairy producers likely decided to take advantage of stronger margins last spring and speed up their expansions that were planned for this year when quota ended. It comes as no surprise then that this year’s milk output could not keep pace with last year’s flood of production.”
All of the major milk-producing nations in Europe reported lower production in February than the year before: the Netherlands, down 2.6 percent; Germany, off 2.1 percent; France, down 2.5 percent; Italy, off 1.8 percent; the United Kingdom, down 1.9 percent; and Poland, off 0.6 percent.
Ireland, the Netherlands, Germany, and Poland are all expected to increase milk production sharply in coming months. However, according to a BBC article, the European Commission says that the end to quota will not mean a return to an era when the trading bloc held mountains of surplus butter and milk powders because China and other markets are hungry for EU dairy products.
However, not everyone agrees. “Europe could have quite a bit of surplus product in the near future because China has not been very hungry for powders of late. Furthermore, Europe has scaled back cheese production and stepped up powder output as it seeks new markets for dairy products they can no longer sell to Russia,” says Sharp.
To subscribe to the Daily Dairy Report, go to: http://www.dailydairyreport.com/default.aspx and click register.