Executive Summary

Market tools including private storage aid and intervention schemes have been made available to European dairy producers and processors since the announcement of the Russian dairy import ban in Sep ’14. Highlights through the first quarter of 2018 include:

• EU private storage aid stocks of butter, cheese and skim milk powder have been completed drawn down following the closures of the schemes in late 2016 and early 2017. Private storage aid of butter and cheese has been closed since the end of Sep ’16 while the skim milk powder private storage aid scheme was closed at the end of Feb ’17.
• Similarly to private storage aid, the intervention scheme for butter closed at the end of Sep ’16. A new skim milk powder intervention campaign was opened at the beginning of Mar ’18, however purchases will be made through a tendering procedure on a case-by-case basis and without a fixed trigger price. Such a process will allow the European Commission to limit or avoid any further stock accumulation.
• Significant quantities of skim milk powder intervention stocks purchased throughout 2016 continue to hang over international powder markets. The European Commission began to offer skim milk powder intervention stocks up for sale during Dec ’16 via a tendering process however just 0.2% of the product sold. 17 additional tending processes have taken place through the end of Mar ’18, with just 6.1% of the total offered product being sold. Bids have been rejected as they were too far from the prevailing market prices. The most recent tender which took place on Apr 17^th resulted in over 24,000 MT of skim milk powder selling at a minimum fixed price of $0.56/lb. Skim milk powder volumes sold at the most recent tender were over double the combined volumes sold throughout the previous 18 tendering events.

Private Storage Aid

The European Commission reopened private storage aid (PSA) for butter, skim milk powder (SMP) and cheese during Sep ’14 in response to the expectation of price volatility generated from the sudden announcement of the Russian dairy import ban. PSA is a payment made by the European Commission to processors in return for keeping products in storage and withdrawn from the market for an agreed period of time.

In PSA schemes, processors retain ownership of the product but receive payments from the European Commission in return for keeping agreed quantities in storage and off the market. In return, processors are paid a rate of aid set by the European Commission that takes into account storage costs, normal depreciation of quality and any foreseeable increase in the price of the product. Temporary storage costs comprise of a fixed rate per ton, plus a set daily amount per ton. The product remains the property of the operators, who are then responsible for selling it when it comes out of storage.

Most of the European Union’s additional production of dairy products has been directed into either butter or SMP to utilize the PSA support provided from the European Commission. Butter PSA stocks reached a three and a half year high of 102,000 tons during Jul ’16 prior to declining over more recent months. PSA for butter has been closed since the end of Sep ’16 and stocks have been fully withdrawn since Jun ’17.

SMP PSA stocks reached a record high of 75,000 tons during Sep ’16 but have been gradually withdrawn since then. PSA for SMP has been closed since the end of Feb ’17 and stocks have been fully withdrawn since Mar ’18.

PSA has historically been made available for only butter and SMP however PSA for cheese was reopened during Oct ’15, allowing for a maximum of 100,000 tons of cheese to be put into storage at subsidized rates, with additional volume limits for individual member states also in effect. Since opening, EU-28 PSA cheese stocks have not exceeded 33,000 tons. PSA for cheese has been closed since the end of Sep ’16 and stocks have been fully withdrawn since Apr ’17.

Intervention Schemes

Intervention schemes, involving selling quantities of products into government owned storage to help stabilize prices, have also been made available to EU-28 dairy producers. Intervention schemes are similar to PSA, as both help to stabilize markets by removing excess supply when prices decline. This can be temporary, where the product is later re-released for sale within the EU, or permanent, where the product is eventually exported from the EU.

Under intervention schemes, the European Commission purchases up to a designated volume of butter and SMP and, if exceeded, a tendering process takes place for additional volumes. Intervention schemes can be seasonal or in response to exceptional market conditions. The intervention scheme is typically open from the beginning of March until the end of September each year, although the 2016 intervention scheme for SMP was extended until the end of Dec ’16 due to adverse market conditions. Similarly to PSA, the intervention scheme for butter closed at the end of Sep ’16. Last year’s SMP intervention campaign was opened at the beginning Jan ’17 but closed at the end of Sep ’17, in line with the traditional open period. A new SMP intervention scheme was opened at the beginning of Mar ’18, however purchases will be made through a tendering procedure on a case-by-case basis and without a fixed trigger price. Changes made to the SMP intervention scheme were made to allow the European Commission to limit (or avoid) additional stock accumulation due to current high stock levels.

The trigger price for butter intervention has traditionally been set at €2,218/ton ($1.23/lb equivalent using a 0.82 USD/EUR exchange rate), while the SMP intervention trigger price has been traditionally set at €1,698/ton ($0.94/lb equivalent using a 0.82 USD/EUR exchange rate). As of the late Apr ’18, average European butter prices were 146% above the intervention trigger price however average SMP prices were 18% below the intervention trigger price.

EU-28 butter prices approached intervention trigger price levels during Apr ’16 but have since rebounded significantly, reaching record high levels throughout Aug ’17 prior to declining but remaining significantly above intervention trigger prices over more recent months. SMP prices declined below intervention trigger prices over the first half of 2016 however prices rebounded to above intervention trigger price levels from the beginning of Aug ’16 until late Mar ’17, when prices briefly dipped below the intervention trigger price. SMP prices once again fell below the intervention trigger price during Sep ’17, prior to the scheme closing at the end of the month, and have remained below intervention trigger prices in months since.

EU-28 SMP offered into intervention increased significantly over the first half of 2016 as prices remained below the intervention buy-in trigger price over much of the period. The intervention schemes originally allowed for up to 60,000 tons of butter and 109,000 tons of SMP to be brought at the designated intervention prices. After the SMP intervention limit was reached in Apr ’16, the European Commission raised the volume ceiling for the 2016 campaign to 218,000 tons, citing ongoing market difficulties. The 218,000 capacity was reached by Jun ’16, when the ceiling was again raised, this time to 350,000 tons of SMP.

Throughout the second half of 2016, SMP intervention purchases approached the 25 year high of 260,000 tons experienced during 2009. 2016 SMP intervention ending stocks of 256,000 tons were in addition to 78,000 tons of SMP bought in via tender during Apr ’16 and Jun ’16 when offers exceeded the previous ceiling levels. SMP intervention stocks reset in Jan ’17 with a new limit of 109,000 tons and 30,600 tons were offered into the 2017 intervention scheme as of the closure of the scheme at the end of Sep ’17.

Significant quantities of SMP intervention stocks purchased throughout 2016 continue to hang over international powder markets. The European Commission began to offer SMP intervention stocks up for sale during Dec ’16 via a tendering process however just 0.2% of the product sold. 17 additional tendering processes have taken place through the end of Mar ’18, with just 6.1% of the total offered product being sold. Bids have been rejected as they were too far from the prevailing market prices. The most recent tender which took place on Apr 17^th resulted in 24,066 MT selling at a minimum fixed sale price of $0.56/lb.

Volumes sold at the most recent Apr 17^th tender were over double the combined volumes sold throughout the previous 18 tendering events. The next SMP intervention tender is set to take place on May 15^th.

Total combined EU-28 intervention and PSA SMP stocks are estimated to have declined 17.9% from the Sep ’16 highs when including the most recent intervention tender sale. Combined EU-28 intervention and PSA SMP stocks are projected to have reached a 22 month low as of Apr ’18 but remain significant overall.