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Skim milk price discount hits biggest in years, amid jitters over EU

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The milk powder price gap rose to its largest in years, amid talk of the European Commission hastening to ditch huge stocks of skim milk built up through intervention buying – which itself could be up for reform.

Skim milk powder prices fell by 5.6% to 17-month low of $1,797 at GlobalDairyTrade, the benchmark dairy auction, far underperforming values of whole milk powder, which dropped by 0.5% to $3,014 a tonne.

The price divergence left skim milk powder – from which fat has been removed – at a discount of more than 40% to whole milk powder for the first time on GDT records going back five years.

And it follows growing concerns over the fate of the European Commission's current skim milk powder inventories, which have swollen to 380,000 tonnes, and talk of reforms to prevent similar stockbuilding ahead.

Price 'floor' to be removed?

Indeed, the ideas of European Union reforms had already been cited as the cause of a drop in Chicago non-fat milk powder futures last week, when the spot October lost 3.6% to set a 15-month low for a spot contract.

"Dairy futures were battered," the US-based Milk Producers Council said, adding that "the milk powder market took the brunt of the blows".

The council flagged "concerns" that the EU is "considering changes to its skim milk powder intervention purchase programme, which has served as a floor supporting the global milk powder market for the past three years".

The shake-up would reportedly see the commission replace the expected intervention buying of up to 109,000 tonnes of skim milk powder (SMP) next year at E1,690 per tonne with a tender system, lacking either a fixed price or a guaranteed price.

'Not any easy options'

Phil Hogan, the European commissioner for agriculture and rural development, told a meeting on Monday that EU intervention would in future "remain available as foreseen in the basic act, but it would be operated in a more controlled manner, on the basis of prevailing market conditions".

He also, according to Agra Facts, said that the commission will "decide what volumes should be accepted and at what price".

As for existing stocks, Mr Hogan said last week that "there are not any easy options but we have to see what we can do to remove this product as quickly as possible out of storage".

The Milk Producers Council said that the "uncertainty" over EU SMP policy has proven "unwelcome in a market already weighed down by heavy inventories".

'Beginning to bow to fate'

The large stocks have also gained the attention of the US Department of Agriculture, which last week said that "downward pressure, caused by global surpluses of SMP and the diminishing prices of protein alternatives, have the once-resilient [US] non-fat dry milk market beginning to bow to fate".

Meanwhile, Dairy Australia said last week that "the large EU intervention stocks will likely be a source of instability in dairy commodity markets going forward.

"So long as uncertainty around the EU's intervention stocks continues, SMP prices will remain low."

Fat vs protein

Overall dairy commodity prices dropped by 1.0% at Tuesday's GlobalDairyTrade to an index level of 1,039, the lowest in six months.

Fat prices, the sector leader of late, were mixed, with butter values falling 2.5%, but those of anhydrous milk fat adding 5.2% to $6,841 a tonne, the second highest on record.

Prices of rennet casein, a dairy protein product, dropped 8.6% to a 15-month low.

By Mike Verdin

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