Futures markets respond to potential removal of fixed price intervention

Published 24 October 17

Recently, DG-Agri proposed that the fixed price for intervention buying of skim milk powder (SMP) be removed when it re-opens in March 2018. If implemented, SMP would then only enter intervention via a tender process, removing the fixed price support from the market. The immediate impact of this announcement, along with the closure of the current buying in period, can be seen in the forward curve for SMP futures contracts for 16-Oct-17.

Between the end of August and the end of September, there was a drop of between €90 -€100/tonne on average in the price of ‘near term’ contracts. Prices then fell further by mid-October, closing at around €1,500/tonne on 16-Oct-17. This is likely a reaction to the approaching closure of fixed price intervention buying of SMP, which effectively put a floor price in the market.

Shortly after it was proposed that fixed price for intervention buying could be scrapped from March 2018, prices for springtime futures contracts fell significantly. This can be seen on the forward curve from 16-Oct-17. Apr-18 SMP futures closed at €1,440/tonne on 16-Oct-17, a discount of around 4% to near term contracts. With milk production moving into its peak period, and the absence of any certainty or floor in SMP pricing, traders did not appear to be willing to pay the typical premium to secure product in the future.

The market seems to have adjusted to this news in the past week however, and 23-Oct-17 closing prices for the Apr-18 SMP contract, while lower, have re-established a premium.

Smp Forward Curves