ife Kiel

European and international dairy
market situation and how to deal with
the price volatility
Prof. Dr. Holger D. Thiele
University of Applied Sciences Kiel
ife Information and Research Center of Food Business Kiel
IFE Institute of Food
Economics Kiel
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
ife Institute of Food Economics
IFE Institute of Food
Economics Kiel
Market analysis
Market information
• Weekly/monthly
dairy market analysis
Europe, US, World
• Cost analysis of the
dairy supply chain
• Process cost
analysis of dairy
industry
• Calculation of
forecast indicators
• Calculation of
European dairy
market indizes
• Calculation of milk
futures prices
• Weekly evaluation of
dairy spot markets
Prof. Dr. Holger D. Thiele
Consulting for dairy
companies
Seminars on dairy
markets
• Consultancy for dairy
and food industry
• Expertise for milk
and dairy contracts
• Consulting/expertise
• Optimization product
portfolio
• Qualification
program board of
directors / board of
management
• In-house seminars
and trainings on
dairy risk
management
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
ife research project example: Economic analysis
of EU dairy sector development beyond 2015
Study: Economic analysis of EU dairy
sector development beyond 2015
Prof. Dr. Holger D. Thiele

This study is a contract work for the EDA
(European Dairy Association) and is finished
in September 2013.

Presentation of the results: 26.09.2013 at
the EDA Conference in Cologne and copies
presented at the EU Conference on milk
markets in Brussels in Sept. 2014.

The study analyses the impact of the
world milk market on European milk
markets and prices in terms of changes in
production, consumption, trade, price
developments, and trends from 1990 to
2025 on the world market, on the EU
market and in selected countries/regions.
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
ife milk indices: helpful for forecast and set up
of reference values in milk contracts
IFE Milk value Europe
IFE Milk Value Germany
• Products: smp / butter NL, F, FRG
• Cash market
• futures market
• Products: smp / butter FRG
• „Kieler Rohstoffwert“
IFE spot milk value
IFE Overall milk value
Germany
• Products: Skim milk concentrate /
cream FRG
Prof. Dr. Holger D. Thiele
• Products: smp, butter, smc, cream,
cheese, wheypowder, fresh milk,
UHT milk, bmp
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
EU milk deliveries: An increase of 4 million t
(+3%) in 2014 seems to be realistic!
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Actual EU minimum milk price level determined
by raw milk value at world level (RMW World)
ct / kg raw milk
55
50
45
40
35
Milk price Germany
30
25
20
RMW Intervention
15
RMW World
10
© ife Kiel 2014
5
Jan 01
Mai
Sept
Jan 02
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Jan 03
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Jan 04
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Jan 05
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Jan 06
Mai
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Jan 07
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Jan 08
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Jan 09
Mai
Sept
Jan 10
Mai
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Jan 11
Mai
Sept
Jan 12
Mai
Sept
Jan 13
Mai
Sept
Jan 14
Mai
0
Source: ife Institute Kiel, own calculations based on BLE, USDA, AMI, ZMB.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Change in milk production of important countries (∆ Mio. t
per month) and in total Mio. t per month)
Change in
Mio. t
Total in Mio. t / month
Belarus
Australia
New Zealand
United States
EU
Total in Mio. t
Source: ZMB, Berlin 2014)
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
EU Exports of Cheese (2013, tons): High impact
of Russian cheese imports on EU milk markets
Russia
257.191
United States
112.939
Switzerland
Japan
51.873
40.818
Saudi Arabia
22.182
Algeria
18.693
Australia
17.229
Libya
16.049
Canada
14.568
Ukraine
14.152
Lebanon
13.613
Iraq
12.879
United Arab Emirates
12.755
Croatia
12.622
Norway
11.868
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Restricted cheese exports and build up of
storage: Impact on world and EU cheese prices
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
EU milk powder production has been extended:
milk powder tend to be in line with world prices
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Convergency and trend to lower prices: World
and EU butter prices
5000
4500
Butter price (EUR per ton)
4000
EU Market Price
(German quotation)
3500
3000
2500
2000
World Market Price
(Ozeania)
1500
EU Intervention/
Reference price
1000
500
© ife Kiel 2014
Jan 00
Mai
Sept
Jan 01
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Jan 03
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Jan 04
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Jan 05
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Jan 06
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Jan 07
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Jan 08
Mai
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Jan 09
Mai
Sept
Jan 10
Mai
Sept
Jan 11
Mai
Sept
Jan 12
Mai
Sept
Jan 13
Mai
Sept
Jan 14
Mai
0
Source: ife Institute Kiel, own calculations based on BLE, USDA, AMI, ZMB.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Convergency and trend to lower prices: World and
EU skimmed milk powder prices
4500
Skim milk powder price (EUR per ton)
4000
3500
3000
EU Market Price
(German quotation)
2500
2000
1500
World Market Price
(Ozeania)
1000
500
EU Intervention/
Reference Price
© ife Kiel 2014
Jan 00
Mai
Sept
Jan 01
Mai
Sept
Jan 02
Mai
Sept
Jan 03
Mai
Sept
Jan 04
Mai
Sept
Jan 05
Mai
Sept
Jan 06
Mai
Sept
Jan 07
Mai
Sept
Jan 08
Mai
Sept
Jan 09
Mai
Sept
Jan 10
Mai
Sept
Jan 11
Mai
Sept
Jan 12
Mai
Sept
Jan 13
Mai
Sept
Jan 14
Mai
0
Source: ife Institute Kiel, own calculations based on BLE, USDA, AMI, ZMB.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
High spread in skimmed milk prices in 2014:
market adjustments are expected
SKIMMED MILK POWDER
160
SKIM MILK CONCENTRATE SPOTMARKET
Index Jan. 2011 =100
140
120
100
80
60
© ife Kiel 2014
11/04
11/10
11/16
11/22
11/28
11/34
11/40
11/46
11/52
12/06
12/12
12/18
12/24
12/30
12/36
12/42
12/48
13/02
13/08
13/14
13/20
13/26
13/32
13/38
13/44
13/50
14/04
14/10
14/16
40
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
New era in European milk prices since 2006:
world market based high milk price volatility!
European farm gate milk price
Intervention milk price level
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
World population development and forecast
until 2025: Growing milk demand
8
7,5
7
World population in
billion people
6,5
6
5,5
World Bank data 1990-2012
FAPRI forecast
5
Source: World Bank, FAPRI, 2013.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
EU population development from 1990 until
2025: stagnation or lower milk demand
520
EU-27 population in million people
510
500
490
480
470
World Bank data 1990-2012
FAPRI forecast
460
Source: World Bank, FAPRI, 2013.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
ife Study 2013: Demand for all dairy products in
milk equivalent terms until 2022 in m.t.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
USD : EUR currency effects: Revaluation of the
Euro decreases milk prices in the EU!
Devaluation of the EUR
increases European milk
prices: Example:
Jan. 2010: 1,45 USD/€
June 2010 1,20 USD/€
= -25 USD Cent
= +7 Cent/kg milk in EU.
US-Dollar per Euro
1,60
1,50
1,40
1,30
1,20
1,10
1,00
0,90
Source: ife, ECB
Prof. Dr. Holger D. Thiele
Jan 13
Jan 12
Jan 11
Jan 10
Jan 09
Jan 08
Jan 07
Jan 06
Jan 05
Jan 04
Jan 03
Jan 02
Jan 01
Jan 00
Jan 99
0,80
The revaluation of the EUR
decreases European milk
prices. Example:
June 2010
Nov. 2010 uro from 1,20
USD/€ begin June 2010 onto
1,40 USD/€ begin Nov.
2010., that means + 20 USD
Cent, produced an EUpricing pressure of - 6
Cent/kg milk.
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Proportion of EU milk production exported out
of the EU will increase in the future!
 Significant trend that proportion of EU milk production
exported will increase to 22.6 % in 2022.
 Significant increasing proportion of EU milk production
exported out of the EU up to 15.4 % in 2022.
 EU milk markets have already benefited from the
world market price trends: From Jan. 2006 until Aug.
2013 an increase of world milk value by 1.0 Cent per
kg milk increased the EU milk value by 0.78 Cent per
kg milk on average.
 There is a strong positive correlation of 0.81 to 0.90
between EU milk prices and world market prices (from
2006 to 2013) (Source: Thiele, Richarts, Burchardi,
2013).
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Milk price volatility will increase in the future
 EU will increase the market share on global dairy markets
=> connection to global markets increase
 New price risks for EU dairy markets due to international
climate and weather risks
 New price risks for EU dairy markets due to currency risks
 New risk distribution in the EU dairy chain: EU dairy
farmers try to reduce their risk taking position
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Price risk of smp/butter > wheat, coffee, cocoa
Cotton
Coffee arabica
Sugar
Maize
Skim milk powder
Butter
Wheat
Beef
Rice
Coffee robusta
Soybeans
Cocoa
Tea
Chicken meat
Prof. Dr. Holger D. Thiele
38%
28%
25%
25%
24%
23%
20%
17%
17%
16%
15%
14%
10%
9%
© ife Kiel
Variation coefficient
2008 - April 2014
Source: Word Bank, ife Kiel, 2014.
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Dairy Risk Management in order to prepare for
post 2015 quota environment
Dairy futures markets in Europe and the United States
Eurex – FBUT since
January 2011
Num
Eurex – FSMP since
January 2011
ber
Contract
sà5t
Price
arithmeti
Euronext Paris – SMP
c since
Num
January 2011
ber
Num
ber
IFE Institute Kiel seminars
and coaching for dairy risk
management
and
dairy
futures markets:
Price
arithmeti
CME, Class III-milk (cheese
milk)
c
since January 2011
Num
ber
Contract
sà5t
 e.g. how to hedge milk
price market risks
 e.g. how to hedge cheese
price market risks
Contract
s à 24 t
Price
arithmeti
c
Prof. Dr. Holger D. Thiele
Contracts à
90 metric t
Price
weighted
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Milk price heding is possible: e.g. using Eurex
European Butter Futures
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
How does the physical quotation in NL, F, FRG
relate to a financial hedge instrument?
Source: Mondelez International, Dairy Risk Management Seminar, Amsterdam, May 2014.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Results
• International and EU milk production is coming back to
former production growth after years of reduced growth.
• Adjustments lead to better supply-demand balances and
allow to build up stocks and reduces volatility.
• Dairy commodity prices will be back to path of moderate
price development.
• Dairy prices will move below the level of the second half
year in 2013 but still above a level of 35 Cent per litre.
• EU-Butter prices will be closer to the international level
• EU will increase their shares in the international markets.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Results
• Higher EU export shares will increase volatility of milk
prices due to exchange risks, political risks, economic
risks.
• Hence, there is a strong need for dairy risk management
strategies in European milk supply chain.
• In general dairy companies in Europe hedge the milk
price risk through to the farmer.
• Growing dairy farms facing more liquidity restrictions and
are interested in lowering the market price risk!
• A market oriented risk management strategy is hedging
milk prices via dairy futures markets.
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)
Thank you for your attention!
ife Institute of Food Economics Kiel
Fraunhoferstraße 13
24118 Kiel (GERMANY)
Phone: ++49 (0)431 2609-8600
Fax: ++49 (0)431 2609-8604
Email: [email protected]
Internet: www.ife-ev.de
 Chairman of the board: Ing. Erhard Richarts
 Managing director/executive board: Prof. Dr. Holger D. Thiele
Prof. Dr. Holger D. Thiele
ife Information and Research Center
of Food Business Kiel (www.ife-ev.de)

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