Volume and price management the two ingredients for a flourishing EU Dairy

Transcription

1 Volume and price management the two ingredients for a flourishing EU Dairy Holger D. Thiele Professor of Agricultural Economics and Statistics University of Applied Science Kiel, ife Economics, 28 Sep holger.thiele@ife-ev.de

2 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Highly integrated milk markets ct / kg raw milk Milk price Germany * Raw milk value world Raw milk value intervention ife Kiel 2017 * Estimated milk prices Germany, August and ember Source: ife Institute Kiel, Germany, ZMB, Berlin, Germany; USDA, Washington D.C., USA.

3 The future environment of European milk markets High milk price volatility! High rates of technical progress (e.g. automatic milking, genetics, smart farming) => Growth of capacities, structural changes in milk farming Higher costs of milk production (e.g. land prices). Higher costs due to new production requirements (GMO free, animal welfare, Nitrogen/Phosphate reduction, ) Seite 3

4 Following from the new environment: => Requirements for risk management and delivery contracts: High price volatility higher than adjustment possibilities of farms => Risk management is necessary! Extreme price crises reduce the liquidity even for long-term profitable dairy farms => Risk and liquidity management is necessary! Necessary to have more cash flow stabilizing delivery connections => New milk delivery models including risk management are necessary! Seite 4

5 Content Milk volume management in Europe some statements Milk price management in Europe Managing milk price volatility and new price differences Looking forward page 5

6 Milk price and risk management tools Public and private risk management instruments Private Price Management tools A/B price systems on dairy company level Fix milk price system based on forward contracts Milk price safety models based on dairy futures Margin protection milk price programmes Private Volume Management tools Milk supply regulation on farm level Milk supply regulation on dairy company level Public risk management tools Direct payments Liquidity support measures Intervention/private storage aid, demand support Milk volume reduction programmes Support of insurance systems page 6

7 Managing strategies based on volumes? Results of a study from ife Institute Kiel in 2015: if you want to know something about the milk price effect of public supply reduction programmes you need to know the demand reactions worldwide and in the EU! The farm gate milk price will increase only about +0.5 Ct per kg milk if you reduce the EU milk market volume by 2.0 %! +0.5 Ct per kg milk is too low to get out of a crisis! but it might help policy makers to demonstrate activity! page 7

8 Managing strategies based on volumes Are private or public-private milk supply reduction programmes help the milk markets? => No! or only minor! => strong incentives for growing farms are very expensive => net reduction of milk volume is often very unclear => many windfall gains for dairy farmers Are private delivery contract adjustments will help the milk marktes? => contracts with more price details (are helpful) => reduction of contract duration will increase costs (overcapacities) => abolishment of 100% delivery to only one dairy company (can not see a positive market effect) => delivery contract design is not a policy issues it is a private issues! page 8

9 Content Milk volume management in Europe some statements Milk price management in Europe Managing milk price volatility and new price differences Looking forward page 9

10 Milk price and risk management tools Public and private risk management instruments Private Price Management tools A/B price systems on dairy company level Fix milk price system based on forward contracts Milk price safety models based on dairy futures Margin protection milk price programmes Private Volume Management tools Milk supply regulation on farm level Milk supply regulation on dairy company level Public risk management tools Direct payments Liquidity support measures Intervention/private storage aid, demand support Milk volume reduction programmes Support of insurance systems page 10

11 EU milk prices in the last 10 years ct/kg 45 milk price farmgate EU Source: ife Institute Kiel, European Commission, Bruxelles.

12 Butter price volatility /t 7000 butter price fob Western Europe in /t Source: ife Institute Kiel, USDA, Washington D.C., ECB, Frankfurt.

13 SMP price volatility /t 4000 SMP price fob Western Europe in /t Source: ife Institute Kiel, USDA, Washington D.C., ECB, Frankfurt.

14 WMP price volatility /t 4000 WMP price fob Western Europe in /t Source: ife Institute Kiel, USDA, Washington D.C., ECB, Frankfurt.

15 Cumulated volumes of milk future contracts at the EEX Exchange in Europe in 1000 t cumulated traded product in 1000 t skimmed milk powder butter Source: ife Institute Kiel, Germany, European Energy Exchange (EEX), Leipzig, Germany, Sep 2017.

16 Farmers can use the information of the dairy future commodity exchange : Negotiation arguments / current daily forecast and market expections Early warning in the case of price crises Indexation of milk contracts based on dairy futures page 16

17 Daily milk equivalent prices based on dairy futures of EEX Butter and SMP future contracts of the EEX are translated daily to a raw milk value equivalent called Kieler Börsenmilchwert. The fluid milk value is based on 4.0% fat and 3.4% protein, farm gate, without VAT. 100 t raw milk = approx. 1 contract (5 t) butter und 2 contract (9 t) skimmed milk powder] Published daily under: Source: ife Institute Kiel, 2016.

18 How dairy companies can use dairy futures? Using the information of the dairy commodity exchange: Negotiation arguments / current daily forecast and market expections Connection of dairy futures to delivery contracts via indexation Longterm delivery contract risks managed by dairy futures: Log in of increasing selling prices even if the physical markets are cautious and no long-term delivery contracts are possible. Get profits from recovering marktes if the long-term delivery contract is still on a low level. Joint contract models via dairy future exchange togehter with the buyer side. Long-term input price risks managed by dairy futures: Fix price protection at declining market prices. Price protection for purchased milk volume at the spot market page 18

19 Content Milk volume management in Europe some statements Milk price management in Europe Managing milk price volatility and new price differences Looking forward page 19

20 Looking forward We need to learn from the past milk price crisis: more risk and liquidity management is necessary and volume management does only to a very small amount help to improve markets. There are many new tools already there (e.g. dairy futures) or in the pipeline (e.g. fluid milk contract, GDT-EEX-auction, )! Advantages of dairy futures: Improvement of early warning on the milk market; daily market forecasts especially in market crises! Dairy companies are able to reduce price risks and losses on the buy side and on the sell side in a market crisis! page 20

21 Looking forward Changes in supply relationship farmers to dairy companies: dairy companies are able to offer new price models (e.g. Fix price models, Index based models, ) on the basis of dairy futures. Risk management helps to increase resilience of milk farmers and dairy processors in risky milk markets Policy should support more the uptake by farmers and processors with support of seminars and research in dairy risk management and dairy futures. The milk lactosphere needs not only innovation in products but also innovation on risk management tools and contracts. page 21

22 Thank you very much for your attention! Holger D. Thiele Professor of Agricultural Economics and Statistics University of Applied Science Kiel, ife Economics, 28 Sep

23 Milk market indicators in Germany ember 2017 (estimations) Milk price (value) level world markets: 36 Ct per kg milk Milk values in different markets in Germany: Kiel raw milk value (Butter/SMP): 42.2 Ct per kg mi k Milk value mixed products (Cheese, Whey, SMC, Cream, Fresh milk, UHT milk, Butter, SMP): 40 Ct per kg mi k Milk value spot markets: 43 Ct/kg mi k Milk prices in Germany: Farm gate milk prices: Ct per kg mi k page 23

24 Cumulated volumes of SMP and butter future contracts at the European Energy Exchange Number of contracts traded butter contracts Number of contracts traded SMP contracts Source: ife Institute Kiel, Germany, European Energy Exchange (EEX), Leipzig, Germany, Sep 2017.

25 German milk prices ct/kg 45 milk price farmgate Germany, 3.7% fat/3.4% protein, since % fat/3.4% protein Source: ife Institute Kiel, BLE Bonn, AMI Bonn, Germany.

26 Dairy product price developments in US-$/t US-$/t fob Western Europe in US-$/t butter SMP WMP Source: ife Institute Kiel, Germany, USDA, Washington D.C., USA.

27 Dairy product price developments in /t /t fob Western Europe in /t butter SMP WMP Source: ife Institute, USDA