Why stock of milk powder is shrinking quickly

After the release of the milk quota (2015), European milk supplies increased rapidly, putting pressure on the prices of various dairy products. Milk prices responded, dropping through the €30 per 100 kilo mark. At the end of 2015, the European Commission therefore started purchasing butter and skimmed milk powder, in order to put a floor under dairy prices and support the milk price.

Due to the intervention scheme, dairy prices in the physical market initially rose again, but at the beginning of 2016 sentiment became negative again. As a result, intervention stocks of butter and skimmed milk powder increased rapidly. Butter stocks amounted to almost 2016 tons in mid-100.000. At that time there was a major crisis on the dairy market, with milk prices well below cost price.

Stocks rose rapidly
The intervention stock of skimmed milk powder grew particularly in 2017, reaching a peak of more than 430.000 tonnes in the 'Brussels warehouses' halfway through that year. The intervention stocks of butter had shrunk to 2017 at the beginning of 0 and the rest is history.

The butter price started a price rally in 2017 that started at the end of 2016. In mid-2017, the ZuivelNL quotation was €6.950 per tonne, which was an absolute price record. A good question, in combination with extremely tight supplies, drove the price of butter to enormous heights. Thanks to the high butter and cheese prices, the milk price was able to recover and the crisis faded into the background.

However, the price of skimmed milk powder did not recover. Initially, the price rose in 2017, but that changed when intervention stocks became sky-high. At that time the scheme was more of a nuisance than a help. In mid-2017, the ZuivelNL quotation for skimmed milk powder was still €2.000 per tonne, but the decline started from that point on. That decline lasted until the spring of 2018, at which time the price had fallen to €1.270 per tonne, a record low.

Good export due to low price
The low prices did give European exporters a competitive advantage, because in 2017 and 2018 Europe exported substantially larger volumes than in previous years. In 2017, the export volume increased by no less than 35% to almost 800.000 tons. The increase will continue this year, albeit to a lesser extent. Partly thanks to good sales on the world market, the tide on the skimmed milk powder market has slowly turned this year.

From March onwards the price shows an upward trend again and positive signals become more visible, especially since the fourth quarter. This week, the ZuivelNL quotation rose to a level of €1.700 per tonne, which is the highest level in 14 months. The reason behind this is the shrinking intervention stock.

'Only 100.000 tons left'
At the beginning of this year, more than 370.000 tons of skimmed milk powder were still in intervention. Due to the low prices in the physical market, there was initially little interest in the various sales tenders of the European Commission. Virtually nothing was sold in the first quarter. The trade therefore opted to stock as fodder to market.

However, demand picked up in April and May and 24.066 tonnes and 41.958 tonnes were sold respectively. A relatively large volume was also sold in the month of June, but in... Third quarter sales were disappointing again. This has changed since October, because since then large volumes have been consistently sold in the tenders. At the beginning of October there was still 280.000 tons, but this had shrunk to approximately 100.000 tons by mid-December.

Record volume sold
This week, a large volume (60.000 tons) of intervention powder was sold again, for an underprice of €1.451 per ton. Never before has such a large volume been sold in a sales tender. The difference between the intervention prices and the prices for skimmed milk powder in the physical market is currently more than €200 per tonne. Prices in the physical market show a clear upward trend, while the futures market (EEX) moves to higher levels for 2019.

The improved sentiment means that parties are becoming increasingly interested in purchasing intervention powder. This means that supplies are dwindling quickly. If the current sales pace continues, the intervention stock will be sold out within a few months. This does not mean that the stock has yet been removed from the market, because it is expected that buyers will bring the milk powder onto the market in phases. The advantage of this, however, is that it is no longer possible to know exactly how much stock is still hanging above the market.

Can milk protein restore?
The high intervention stocks have put pressure on the value of milk protein in recent years. This was compensated by high butter prices and good cheese prices, which allowed the milk price to pick up in the second half of 2016 and remain at the same level. With the disappearance of the intervention stock, milk protein has been given the opportunity to recover further. This will probably provide an additional foundation, which will put less pressure on the milk fat in 2019.