By Nick Holt-Martyn, The Dairy Group

Any signs of market encouragement last month have been squashed by Sterling’s rise and further Brexit uncertainty. While the EU is seeing a firming cheese position on the back of flat production and rising SMP prices, the UK is not.

Although UK milk production has stabilised and SMP prices are up, a rapid decline in Liquid utilisation over the last couple of months suggests problems in the Liquid sector are set to continue.

Over the last three years, liquid volumes are declining compared to the other products at a time when milk supply has been rising, up two per cent in the last year and 3.4 per cent over the last two years. At a time of year when seasonally reduced supply normally pushes liquid up to more than 50 per cent of available supply, in September 2019 liquid utilisation was down by 6.8 per cent at just 45 per cent of the Net Available Milk.

Cheese growth has stabilised and Powders have recovered their position as they respond to better returns. The decline in Liquid increases the supply available for other products to absorb with the slack being taken up by Milk Powders, Yoghurts and other products.

With Liquid in turmoil Cheese remains the main market driver. The recent imposition of tariffs by the US in a WTO approved retaliation for State support of the EU aircraft industry is starting to impact on exporters of UK cheese in just two weeks.

This shows what adverse tariffs can do, with the 25 per cent US tariff on dairy products a foretaste of what a no-deal Brexit could look like, except that a no-deal would affect trade with our biggest trading partner, the EU. It would also open the UK up for unfettered imports as welfare standards, hormone growth promoters and the chlorine washing of chicken are not recognised by the WTO as legitimate barriers to trade.

The threat of no deal has not gone for good but depends on a successful negotiation of a free trade agreement with the EU.

All this adds up to a continued uncertainty for the UK dairy markets which will negatively affect the farm gate price almost irrespective of the tenor of the EU or global market.

Market Prices

The Market Price Equivalent (MPE) slipped back, down 0.29 to 29.3 ppl (-1.0 per cent). MPE is down 0.7ppl (-2.3 per cent) in the last six months and down 2.0ppl (6.4 per cent) year on year. SMP rises 3.9 per cent to £2,040, Butter was down 1.9 per cent and Cream down 6.7 per cent despite butterfat supply easing back 1.4 per cent.

This is the first time since July 2014 that SMP prices have been above £2,000/t.

The range across the sectors falls back to 2.1 ppl from Liquid /Cream returns to Cheese/Butter with powder returns exceeding cheese/butter returns. The GDT price equivalent has eased back to 27.2 ppl, due to Sterling’s gain in recent weeks. The UK SMP price has narrowed to £105/t below the GDT auction but is £577/t above Intervention. Global supply growth has risen to 0.5 per cent in July with the EU supply +0.6 per cent in July so is expected to remain around +0.5 per cent through late summer/autumn.

Farm Gate Prices

The September 2019 farm gate price has risen by 0.8 ppl to 29.7 ppl, up 0.8ppl (2.7 per cent) in the last six months, down 0.9ppl (-3 per cent) in the last year. The rolling Farm Gate price drifts lower to 29.3ppl, but continues to remain above 29ppl suggesting the milk price norms of 26-32ppl and a rolling average of 29-30ppl.

Production in August was confirmed at 1,205 M litres (+9 M litres) and September was 1,156 M litres (+2.5 M litres). UK weather has turned cooler with a lot of rain to bring an early start to winter. October production is running at -0.1 per cent at 1,200 M litres (+2.5 M litres) and November is forecast at 1,170 M litres (-5 M litres) subject to weather conditions.

UK 2019/20 supply is now forecast at 14970 M litres, +0.7 per cent, +98 M litres. The General Election period will provide little clarity so everything is on hold until the outcome is known. Sterling continues to react and is currently up sharply to £/€1.16 and

£/$1.3 at end of October.

Milk prices are falling particularly in the cheese sector suggesting the downside has arrived despite market improvements in the EU. With the average cost of production at 33.7ppl in 2018/19 profitability is still elusive with political uncertainty continuing.

READ MORE: MPs urged to investigate issues with liquid milk market