European SMP Prices Risk Moving Higher Over Tight Milk Supplies and Higher Cost of Running Driers.

Market-Price Behaviour

The state of European skim milk powder (SMP) supply and demand look unbalanced - buying activity continues to be heightened while supplies and stock availability remain tight. Available supplies are all already committed. The front-month contract has been kept up aided by increased demand from dealers with short term needs and purchases from the consumer market. This is emanating from the ongoing conflict between Russia and Ukraine causing buyers to be anxious about future buying. Prices have held firm gaining €798/mt over the first quarter of 2022 to finish at €4170/mt.

High Energy Prices and Higher Cost of Running Driers

The higher cost of running driers is driving the upside risk in the market and market sources expect this to continue. The high energy prices on the back of the Russia and Ukraine conflict are being strongly felt in the dairy sector. Production of skim milk powder is a very energy-intensive exercise. Any rise in energy cost tends to go beyond increasing the cost of production but also disincentives factories to churn out skim milk powder. Brent crude for example is trading at 104 USD/Bbl up 77% from the price at the same time a year ago. Similarly, natural gas at 5.86 USD/MMBtu, up 139% YoY. It is therefore not an understatement to argue SMP suffered the contagion of growing energy costs. Currently, many processors are either finding it extremely difficult to purchase natural gas at these incredibly high prices or finding it challenging to access adequate natural gas to run their driers. Powders may hence continue its bullish momentum.

Uncertain Milk and SMP Supplies

Milk supplies have remained negative throughout many European top producer countries in recent months: production in January according to data supplied by CLAL fell 2% behind last year at 11.67 million mt. Germany and France, which account for 21% and 17% respectively of Europe’s milk supplies, also reported continued lower production on the back of recent colder temperatures. Although numbers for February are yet to be confirmed, Tridge’s unofficial estimates of February production puts it at 11 million mt, down 5% MoM. Unavailable milk should tighten SMP production further. European 27 skim milk powder production in January according to CLAL data fell 2.5% YoY 0.177 million mt. The daily average of SMP production in the EU 27 in January was also down at 3780 mt versus 3870 in January 2021.

Looking Ahead

Going into the second half of the year, skim milk powder together with dairy commodity prices should remain high amid inflationary pressures and tight supplies. The only potential downside according to trade sources is a change in consumer behaviour. If for some reason, we see a significant fall in retail demand, then it would keep a lid on SMP prices from going further up.