EU takes a big gamble with milk powder

The EU opens tender number 20 on February 17 in an attempt to sell skimmed milk powder from intervention. This tender differs from the other tenders because the volume that will be offered (99.156 tons) is much larger than the previous tenders.

Of the total, 30.836 tons are offered in Belgium, France (14.860 tons) comes in at number 2 and Lithuania (13.289 tons) is in third place. The volume offered corresponds to a share of 26% in terms of the quantity of milk powder stored in private storage (2.754 tons) and in intervention (378.577 tons).

Ambitious volume
It is an ambitious volume, because in the previous tenders the volume sold was 40 to 220 tons. Only the auction of January 16 was an exception, when 25.764 tons were offered and just over 7% of that volume could be sold (1.864 tons). The Netherlands represented the largest volume (800 tons), Belgium followed with 588 tons and Denmark closed the top 3 (216 tons).

The volume sold does not deserve the top prize, but the pricing is especially alarming. For example, the bids (€700 to €1.350 per tonne) were much lower than the current level. Ultimately, the business took place at the pre-established underprice of €1.190 per tonne, almost 16% below the January futures market quotation.

Against this background, tender number 17 will be an exciting one. Not only for the European market, but also for the global skimmed milk powder market. The sales price is far below the former bottom of €1.698 per tonne and the world market has therefore lost an important safety net.

EU more important than CCT
If the €1.190 per tonne is converted into dollars per pound for Nonfat Dry Milk (NDM), this corresponds to a price of $0,70 per pound. Just below the price made on the Chicago Stock Exchange. The fact that Chicago did not register lower was due to the Global Dairy Trade (GDT) of 1 week earlier. Under the influence of drought in New Zealand, this supported a price of $0,88 per pound.  

The situation will become even more complex when the EU as a whole says goodbye to the current intervention. This means that the global safety net for the price of skimmed milk powder will disappear and that is precisely what has made the difference between low and dramatically low milk prices in recent years. Remarkably, it is the United States (US) that, in a quick response to low milk prices, could yet turn the tide. In the EU, a brake on milk supply is not yet expected as a result of still relatively good milk prices.

Private storage does work
The intervention scheme has proven to be a hindrance to the market, but private storage has certainly helped. In 2017, 87.807 tons of SMP disappeared. Large volumes could be stored, especially in the months of February, May and July. Private storage also appears to still work well for butter. 2017 started with 24.697 tons of product and 227 tons of this remained in December. 

The dairy market is further challenged by the extra liters of milk. The biggest growers in November were Ireland (+16%), Romania (+12%) and the Czech Republic (+11,8%). Another 8 Member States experienced growth of 5% to 10%, including the largest producers: Germany and France. Past experiences show that once the milk flow has started, it takes a lot of time to stem it again.The EU will attempt to get rid of a substantial volume of SMP from intervention.