Currency movements ‘a major plus’ as dairy markets strengthen
A key driver in the recent dairy markets surge has been the role played by currency movements, according to the ICMSA.
It says that with the euro-dollar exchange rate at its lowest point in five years and the continuing weakening of the euro it is having a significant ongoing effect on products quoted and sold in US dollars and Sterling.
The ICMSA Deputy President, Pat McCormack, has noted that any relative weakening of the euro increases returns from export markets and he points out that in the last year alone the euro has weakened close to 20% against the Dollar.
The on-going weakness of the European economy with prolonged deflation and close to zero growth means the likelihood of the ECB continuing its policy of low interest rates and Quantitative Easing and this, according to Mr McCormack, is having noticeably beneficial side-effects for Irish dairy farmers.
“Milk products are generally quoted and sold in US dollars meaning more euros are returned if the price remains the same and the euro weakens. There’s also the fact that Ireland export large quantities to the UK market and the euro-Sterling rate is also moving in our favour.”
To put all this in context, ICMSA have looked at the product price of butter and skimmed milk power sold in the US in November 2014.
The average price sold on that occasion was US$44.25c/L equating to €34.96c/L at the given average exchange rate for the first week of November.
Fast-forward two and a half months to the present and if the same price is returned on the market, it would convert to €38.83c/L.
“This is a huge difference of 3.8c/L before any changes to underlying market conditions are considered and shows how far in value the euro has fallen against the Dollar – almost 10% in that time. The indisputable fact that European and Irish processors are achieving gains at the currency level means that Irish farmers will be justifiably demanding a higher price in 2015 than had been previously anticipated”, said Mr McCormack.
He went on to say that in further good news for Irish milk suppliers, Fonterra has announced a reduction in its milk volume forecast for the 2014-15 season to 1,532m kg as a result of the impact of dry weather on production in recent weeks.
“This new forecast is 3.3% lower than the 1,584m kg collected last season and represents the first real indication of weather interfering with milk supply on world markets in the last 18 months and has been reflected in the latest Global Dairy Auction with a 9.4% increase in prices.
“The worldwide drop in price has been driven by an unprecedented increase in supply on world markets due to near perfect production conditions worldwide and the recent slowdown in production in the EU should not go unnoticed as the prospect of superlevy ‘kicks-in’ across the EU.”