How effective was SMP Intervention and what now for milk prices?

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The bulging Skimmed Milk Powder (SMP) Intervention stores have almost emptied. Only 15 months ago there was 380,000 tonnes of product in stock and now it stands at 3,000 tonnes.

It was lauded in Brussels with the Agriculture Commissioner saying that the three-year process had shown public intervention to be a proven and effective tool and demonstrated the EU’s commitment to support European farmers.

However, we should pause, take a breath and see if it was quite so effective.

“Public Intervention” is “a safety net”, namely the buying-in of SMP and butter into public storage, where it is offered by private operators and bought in at a fixed price by the European Commission. The product is then sold back via a tender process to licenced buyers.

This round of Intervention focused on only SMP (no butter) and was actioned in response to the 2015/2016 milk price crisis and it was the only tool available to address what was a critical situation for the dairy industry.

Intervention sales commenced in December 2016.

Commodity milk prices started to recover in late 2016, yet SMP stocks continued to enter stores at increasing volumes. Eventually the European Commission took action to limit SMP Intervention stock accumulation (they actioned a temporary ceiling to the buy-out ceiling) but by now there was 380,000 tonnes of unsold SMP in stores. The graph above shows the rapid increase in 2016 to 2017.

The first sale took place in March 2017 and over the next 12 months only 180 tonnes were sold. It was not until April 2018 that a significant volume left the stores when 24,066 tonnes were sold. However, with a selling price of $1,051/tonne it was sold at discounted prices. And 350,000 tonnes remained.

Analysis by Wageningen University has shown that the gradual phasing out (or as Commissioner Hogan put it, the responsible use of Intervention) actually had a negative impact on the EU SMP prices. The UFU did a similar analysis using Dutch Dairy Board/ZuiveNL data, for 12 months from 1 June 2017, the average SMP (food grade) price was £1627/tonne (14.67ppl). The same figure for the following 12 months was £1354/tonne (12.21ppl). It is only in the last six months that EU SMP commodity prices rose again, with the average since 1 June 2018 being £1486 (13.24ppl)

Analysts have questioned the effectiveness of the last round of SMP Intervention. This is further backed up by the fact that farmgate milk prices in the EU were 9% lower in 2015-2018 compared to 2012-2015. The latter being the period when Intervention was taking product out of the market. AHDB have calculated that the net cost of Intervention is €220 million (including storage) which equates to 0.66ppl. Bringing this information together, it can be assumed that the only boost to prices has been seen in the last six months and now going forward, some might argue that the boost has been short-lived and has essentially evaporated.

Previously the European Commission, notably in 2010/11, sold Intervention for lucrative returns, yet this time round they did not. This might have been a different story had the Commission considered alternate outlets for the product; biomass, a protein source in animal feeds or a compliment to calf replacer.

In summary, Intervention is one implement in the Brussels toolbox, which may not have had quite the desired impact many may have envisaged.

As far as farmgate prices are concerned in Northern Ireland, the picture is looking stable, despite uncertainty surrounding Brexit.

The boost to the dairy commodity market from emptying SMP intervention stocks, would appear to have been short lived. Furthermore, in the past four weeks, butter markets have eased (but certainly not crashed) with prices generally falling to between £3,600 and £3,700 by late February. On the other hand, the most recent WMP commodity prices in the Netherlands have reached €3,000/tonne for the first time since September 2017 and cheddar markets are stable. Demand has been lacklustre, with buyers apparently unwilling to commit. This is due to the imminent spring flush in milk production. Yet the feeling in Northern Ireland is that unlike in GB, we have ample processing capacity to deal with any increase in supplies, which would allay any fears of oversupply.