Milk powder intervention: support or disruptor?

The price of skimmed milk powder has been dramatically low for some time now. The European intervention stocks are a problem for many milk processors, because this prevents the price from recovering. Is that why market intervention is so successful, and are there any alternatives at all?

Intervention is an instrument that the European Commission (EC) mainly uses to prevent a price crisis for agricultural products (such as milk, grain and pork). Buying stocks removes the excess supply from the market. Intervention therefore functions as a kind of safety net for market prices. However, if the stored stocks hover (too) long above the market, the price will not have a chance to recover.

This is now happening with skimmed milk powder. Stock figures show that there were about 2017 tons of skimmed milk powder in the 'European warehouses' at the end of 378.000; the highest volume since 1991. By way of illustration: this is barely 20% of the annual volume of skimmed milk powder traded in Europe.

These stocks, a small part of which are also in private storage, have been providing mood-setting for buyers and traders for some time now. The fact that the stocks will ever (sooner or later) come back on the market is too much for speculation. Milk processors are therefore left behind.

Not interested
It is not the case that the EC is not taking action to reduce intervention stocks. Since end of September the EC has definitively stopped buying up the stocks, and in recent months tenders have been regularly launched to sell. However, the enthusiasm of buyers is very limited. Only 40 tons (0,01% of inventory) were sold during the October sales round

Also in the month of March was sold relatively little at ever lower prices. European Commissioner Phil Hogan already considered selling intervention stocks at an earlier stage as animal feed and thus make a clean sweep. So far, however, he has not made any decisions. The feed sector has already indicated that it is not interested in this. 

That there is a lot of demand worldwide for skimmed milk powder, the export figures prove. In 2017, the European countries jointly exported more than 788.000 tons (+36%). Dutch sales outside Europe increased by 42% to 78.000 tons. Of course, sales were helped by the low price.

(Text continues below the chart)Since 2014, the trend has been clearly downward. The current price (March 2018) is historically low.

Despite the increasing intervention stocks, the milk price managed to rise above €2017 per 40 kilos in 100. However, this was solely due to the good cheese price and the record high butter price, due to the urgent shortage in Europe. This year, with the price of skimmed milk powder surging, there is enormous pressure on fat and cream prices, in order to keep the milk price at an acceptable level. The support below the milk price is therefore not stable; certainly not now that milk supply in Europe is likely to increase again.

There is no alternative
The question is: are there alternatives to market intervention? A study by LTO Nederland shows that there are none. Abolishing intervention is also not an option, because without this market mechanism prices will fluctuate even more. However, now that the price of skimmed milk powder has been falling for more than 2 years, you can ask yourself whether the remedy is not worse than the disease in the long run.

The past shows that the price of skimmed milk powder picks up quickly when intervention stocks dissolve. The market likes to calculate how many months it will take to get rid of this volume (based on the last volume sold). There are currently 91, which means that the European Union will be rid of its stock in 7,5 years. In practice, however, this is not possible due to the age of the product.

However, the longer the stocks remain, the lower the price will trade. As the product becomes obsolete, it becomes less and less interesting to purchase. The wish of the European Milk Board (EMB) to sell intervention stocks above market prices does not seem feasible in any case.

short pain
This means that Brussels has to take the loss anyway. After all, it cannot be ruled out that the yields will still exceed the intervention prices. In practice, short pain is often better than long pain. The options that then remain are: the animal feed industry or the food bank. The EC may also choose to continue to quietly market the stocks. With the expected milk supply, buyers are then guaranteed to continue to lean back, and the foundation under the milk price will remain fragile for the time being. 

Wouter Job

Wouter Baan is editor-in-chief of Boerenbusiness and Food Business. He also closely follows the raw materials markets and focuses on animal proteins such as dairy and meat. He regularly interviews leaders from the agricultural sector and the food world.

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