Markets and Brexit Mike Johnston Markets Whats the
Markets and Brexit Mike Johnston
Markets What’s the story?
Rollercoaster year • Autumn 2017 – concerns that markets were falling (3/4 year cycle) • Wet spring 2018 – markets rallied and tailed • Hot summer - markets rallied • Autumn 2018 – futures falling All driven by buyers placing supply based bets.
Global Milk Supply Snapshot: Jan – Oct 2017
Global milk supply snapshot: Jan – June 2018 1. 8% EU 28 1. 1% Mixed picture in Q 3 US Higher feed prices 2. 7% Australia Drought impact in Q 3 0. 5% 0. 8% Global Continued growth NZ July +5. 6%
EU Milk Supply Snapshot: Jan – Oct 2017
+0. 6 -1. 8 +4. 4 -2. 1 +1. 5 -0. 5 -4. 0% to -1. 8% to -1. 5% to -0. 7% -0. 1 +0. 4 -1. 4 +5. 5 -0. 7% to 0. 0% +2. 9 +3. 3 0. 0% to +1. 8% to +3. 2% +7. 9 +3. 2% to +5. 2% +4. 1 +5. 2% to +14. 0% -0. 2 n/a +3. 7 +0. 8 -3. 0 +1. 5 -1. 3 +7. 3 +2. 9 +13. 4 +2. 4 +3. 0 -1. 7 -1. 5 Source : MS' Communications to Eurostat, FEGA, AGEA, Reg. 479/2010. 1(a)1 Page - 5 - +6. 6 Netherlands -1. 4% Ireland -0. 5%
Global supply Q 4 2017 Increasing milk production + 363 K tonnes SMP in Intervention = Buyer sentiment: supply not a problem
As at 5 December 2017 € 6970 € 4360 € 4660 € 1930 € 1698 € 1450
DDB prices as at 13 December 2017 Butter € 4340 -€ 320 w/w -28% on mid September peak SMP € 1420 -€ 30 w/w -25% on January
Global supply H 1 2018 Weather impact EU: Cold March, wet April, hot May, June, July NZ: poor grass growth H 2 of 2017/18 season Milk supply increased BUT Not at the rate expected Buyer sentiment: supply might be a problem
RESULT Bullish market
Global supply H 2 2018 Improving weather in Europe + Strong start to NZ season Supply side recovery Demand side softening (yesterday’s GDT -1. 3%) Buyer sentiment: supply unlikely to be a problem
Forward curves falling Indications of bearish market
Summary • Milk production increasing in EU, NZ, and USA • Significant SMP stock overhang in EU + USA • Buyer sentiment - no supply issues • Indications of markets softening
Global issues Q 4 2018 into H 1 2019 Cow culling • NZ (Mycoplasma bovis) • Ireland (winter feed shortage) Trade wars • Mexico/US • US/Canada • EU/US • US/China SMP stock overhang • EU • US • India Farm margins Brexit • Deal/no deal
The “B” word What’s the story?
Phases of Brexit 24 June 2016 Shock Disbelief HSWD WDN Scenarios Lobbying Possible futures Industry “Asks” Government papers Industry engagement CTJ Mushroom Joint In the Agreement dark 191 days to exit UNCERTAINTY
“Read my lips” • EU single market will not be compromised • There will be no cherry picking Consistent EU position.
Process has been defined by red lines EU • SM integrity • No cherry picking • No Irish border • Free movement of people Red lines are not “negotiation friendly” UK • Control of laws • Control of immigration • Leaving SM + CU • No Irish border • No border in Irish Sea
Irish border: Gordian Knot of Brexit Joint Report • • • No hard border No physical infrastructure No checks No controls NI to have continued “unfettered access” to UK market Default position – full alignment with rules of IM and CU to support all-island economy
Irish border: Gordian Knot of Brexit Still to be agreed - Avoid NI being backdoor into SM - Backstop or FTA - Harmonisation Vs equivalence
Irish border: Gordian Knot of Brexit 2 main issues (i) NI as backdoor to SM (ii) Divergence - major threat to NI agri-food - will stress any model - Need a safety net to protect NI firms - Post Brexit internal UK market
“No deal” - issues for companies - How likely? - Where to invest to hedge? - How much to invest? “Technical notes are useful in providing understanding of no deal. The problem is they don’t provide answers” Robert Huey
“No deal” - issues for companies • • Packaging lead-in up to 5 months What labelling? Packaging stock run down November/December selling into Q 2 2019 Tariffs? Documentation? Customs controls? Storage capacity/availability? Cash flows
Day 1 preparedness - What FTAs will be available? - Animal Health Export certificates? - Tanker drivers? - Packaging /labelling? - Continued operation of all-island value chain?
Works because: - Common standards - No border controls - Robust auditing
Impact of border delays Ø 30, 000 milk tankers/year Ø Delay costs £ 1/tanker/min Assume 1 hour delay each way = £ 8. 5 m per year Plus - More tankers @ £ 140 K each - Product quality
What we need Ø Ø Ø CLARITY – ease the uncertainty asap “No deal” not an option Continued access to GB – underwritten in legislation Close trading relationship with EU No divergence (plus safety net mechanism) Continued all-island value chain No compromise on standards for imports Continued access to EU FTAs Maintain our robust traceability AHEC sorted NI Executive
Golf is a good walk spoiled Mark Twain Politics is the art of spoiling a good trade deal
Phases of Brexit 24 June 2016 Shock Disbelief HSWD WDN Scenarios Lobbying Possible futures Industry “Asks” Government papers Industry engagement CTJ Mushroom Joint In the Agreement dark 191 days to exit UNCERTAINTY
. . . . as we know, there are knowns; there are things we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there also unknowns - - the ones we don't know. Donald Rumsfeld
Butter SMP WMP Cheddar 6, 0 Aug-17 08 1, 7 78 6, 4 Sep-17 67 1, 6 5, 9 EU wholesale prices Nov-17 44 3, 3 61 2, 7 85 1, 5 54 01 22 96 3, 3 2, 8 1, 4 5, 5 05 54 31 3, 2 2, 7 1, 5 5, 6 Aug-18 69 2, 6 1, 4 5, 7 3, 2 44 50 54 Jul-18 24 2, 6 1, 3 5, 6 3, 1 90 02 49 Jun-18 93 2, 5 1, 3 5, 1 3, 1 23 74 31 May-18 48 2, 5 1, 3 4, 8 3, 1 88 89 87 Apr-18 24 2, 6 1, 4 4, 5 3, 3 17 63 08 Mar-18 03 2, 7 1, 4 4, 4 3, 4 63 55 69 Feb-18 20 2, 9 1, 5 4, 9 3, 5 24 32 16 Dec-17 03 3, 0 1, 6 5, 2 3, 5 28 66 08 Jan-18 56 Aug 17 – Aug 18 74 96 Oct-17 87 3, 0 3, 345 2, 8 24 3, 3 49
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