ROBERT SCHORSIJ, Managing Director Greenmark Dairy Ingredients: The Pros and Cons of selling EU SMP intervention stocks

robert-schorsij_180webDuring their meeting last Thursday, the EU has put the re sale of intervention Milk Powder back on the agenda.  The proposal is to sell 22.150 mt by tender on the 13th December. On 24th November an official vote will be held to whether or not to execute the proposal (by the time of the publication  the EU voted Pro this proposal – Infagro).

If that gets approved, we may likely see tenders held twice a month during 2017 to sell off the balance of the intervention stocks.

To many a market participant the proposal that was brought in last minute during the EU meeting of 17th November, has come as a surprise.

The EU has always said they wouldn’t release the interventions stocks back onto the market until a sustainable recovery in milk prices had been achieved.

If that is the case remains to be seen.

The EU forecast for milk production in 2017 is a small growth of 0,7% – 1 %, which basically means that everything the EU produced in 2016 can be produced in 2017. In fact 0,7% is higher than domestic dairy consumption growth so that in 2017, even more than in 2016 EU has to rely on exports outside the EU.

Even though EU has been successful in increasing dairy export during 2016, it wasn’t enough to offset the incremental production of ytd August. Incremental exports ytd August have been 500 million kgs of milk equivalent, while production at that point had increased by  2,1 billion kgs.

It was only because of the EU intervention program, which took about 2,5 billion kgs Milk Equivalent out of the market, milk prices got room to improve. Now, through intervention sales, the EU proposes to put 160 million kgsback  onto the market again, still this year.

Although it is plain to see the intervention stocks are a problem to the EU and the market, it seems the timing to start selling now is wrong.

Of all dairy products, SMP ( that increased 20% in price  vs intervention level) , has been the product of which the price rose least of all. Cheese doubled. Across the board other product’s prices increased by 35% and more.

But let’s not focus on the short term, it is only 22.000 mt. after all.

During 2016, EU intervention was needed to restore milk prices.  EU did this by taking 2,5 billion kgs Milk Equivalents out of the market through the public intervention program.

If EU indeed produces a little more milk than it did in 2016, it is easy to see that intervention sales are not such a good idea.

By selling intervention stocks back to the market in 2017, EU effectively feeds the market an incremental 2,5 billion kgs of milk. We know however that intervention was required to restore pricing. In the current 0,7% milk growth scenario, EU runs the risk to undo  what they did so effectively in 2016: Restoring the balance.

Even if EU, contrary to their own assessments, would produce less milk in 2017, it is highly unlikely that that would translate in a 21% lower SMP production. 21% lower production equals the current intervention stocks. As SMP production amounts to about 7,7% of EU milk output, it is easy to see why the market will be overfed in 2017 should EU pursue the proposals

To vote yes for the proposal would be a mistake, as it essentially doubles the problems EU faced in 2016 with excessive milk. It would increase available milk by an incremental 1,65% on top of the current 0,5% forecast.

2,15% amounts to 3.3 billion kgs of milk. This come on top of 2016’s production, a year in which we found out, EU needed to intervene by taking 2,5 billion kgs milk equivalent out of the market.

Bringing back public intervention stocks onto the market effectively faces the industry with a surplus of 5,8 billion kgs of milk equivalents.

When we calculate this back, this represents 790.000mt of Skimmed Milk Powder or 892.000mt of Butter.

The combination of the two would give 575.000mt of SMP and 302.000 mt of Butter.

We would like to be optimistic but there is the reality that there is simply no market for such a volume of incremental product. Not in the EU and not outside.

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