Markets

That was the year that was

By Jo Bills

IT’S THAT time of the year when we look back — sometimes in anger — at the journey of the past 12 months.

This time last year we had a different prime minister, the Federal Government was still opposing the Banking Royal Commission, the Marriage Equality Bill was passing through the Federal Parliament, Richmond was the reigning AFL premier and the #MeToo movement was just emerging in the United States.

That all seems so long ago, such is the churn of events and news these days.

It’s almost as exhausting following the swings and roundabouts of dairy.

Global markets continue to work through the still sizeable SMP stockpile under the stewardship of the EU Commission, which currently stands at around 250 000 tonne — 120 000 tonne less than at this time in 2017.

What has resulted is the fanning out of dairy commodity prices through much of 2017, as shown in the chart of spot prices below.

Depressed SMP prices continued to deter European manufacturers from directing their available milk into SMP/butter production.

With supply limited for the first half of 2018, butter prices remained at historic highs for a chunk of the year. But with New Zealand availability improving and European demand softening (pardon the pun) at high retail prices, butter values are heading back to earth.

On the other end of the spectrum, the stockpile has kept SMP prices skidding along at around US$2000/tonne for the past two years.

This has also capped WMP prices, as high dairy fat values have encouraged manufacturers and end users to switch to fat-filled milk powders — taking advantage of low vegetable oil input costs. The pressure on WMP prices has also ramped up — as evidenced in recent GDT events — with a good start to the New Zealand season which will increase supply.

That leaves cheddar, the Australian industry’s most important export product, which has finished the year at slightly weaker spot price quotations than it began.

The large cheese producing and consuming regions of Europe and the US continue to exert the greatest influence on the market, based on the balance between internal supply and demand.

Import demand has been steady if unspectacular in most Asian regions throughout 2018, with the notable exception of China. Cheese values are also influenced by the value of milk components in SMP and butter.

Overlaying the dairy market’s own dynamics in 2018 has been the escalating trade tension between the US and a number of trading partners — in particular China, Mexico and Canada — and increasing uncertainty over the Brexit outcome.

It seems the new NAFTA, known as USMCA — which for all the posturing and chest-beating from the Trump administration over the past 12 months, is only marginally different from the pre-existing agreement — is pretty much a done deal.

There is a slight increase in access for US dairy to the still heavily protected Canadian market in the new deal, which could be signed by country leaders at the G20 summit.

The escalating trade war with China is much further away from resolution, and has potential for greater impacts for our region.

The escalating retaliatory tariffs imposed by China and the US on each other this year have impacted cheese and whey trade directly. More broadly, the uncertainty around the effect of the impasse between the world’s two largest economies is likely to hit economic growth — particularly in Asia.

There is talk that a cease fire could come out of the G20 pow-wow, but it’s Trump, so anything could happen.

Then there’s Brexit. Despite the EU and UK PM Theresa May reaching an agreement, she still has to sell the deal to her own cabinet and the British people.

The Bank of England recently predicted that remaining in the European Union would be a better outcome for the economy than any of the Brexit scenarios on offer, and there is a significant push for a people’s vote on the deal from the community if not from the politicians.

The shambolic Brexit process, leading up to the looming March 2019 deadline, has instilled very little confidence that trade will continue seamlessly. Reports of stockpiling of food and medicine seem incredible, but reflect how much of the outcome is still unknown.

The UK is a deficit country for dairy, but it cannot negotiate any new trade agreements until it exits the EU.

What lies ahead?

As the saying goes, you should never make predictions — especially about the future!

Global dairy market fundamentals suggest a gradual firming of commodity prices through 2019 as supply and demand shifts into closer alignment. Limited EU milk production growth is critical to this outlook, as is demand for milk powders from China and South-East Asia.

We expect dairy commodity prices will continue to converge as SMP stockpiles are reduced, improving prices, and butter values settle in more sustainable territory.

Cheddar prices are susceptible to peak EU milk production and increased US export activity mid-year, but are forecast to strengthen through to the end of 2019.

Undermining any skill or certainty we might have about predicting what lies ahead for the global dairy market is the truly unpredictable and volatile nature of international relationships and trade more broadly.

The weakening of international institutions, democratic and diplomatic norms — which have underpinned co-operation between nations for decades — has been a feature of 2018.

There are no signs 2019 will be any different, and the impact on global economic growth, which has been fairly resilient to date, could be profound.

• Jo Bills is a director of www.freshagenda.com.au