Market reactions to alternative intervention sales strategies

Published 16 May 18

The high level of skimmed milk powder (SMP) stocks in intervention, along with the uncertainty on how the Commission aims to manage them has created a great deal of uncertainty in the markets. A recent report by Wageningen University has looked at the potential impacts of different destocking strategies in terms of market prices and budgetary cost.

The scenarios were:

  1. Fixed sales pattern of monthly sales of 20,000 tonnes/month over the 18 month period.
  2. Sales for non-human consumption.
  3. Mixed sales strategy with separate tenders for fresh stock (less than 18 months old) and older stock (more than 18 months old), which will need to be sold at a discount.

For all three scenarios, it is assumed that all stocks will be sold by the end of 2019.

The relative impact of each scenario on market prices and its associated budget cost are summarised below.

Scenarios For Selling SMP

The strongest price effect results from following a strategy of gradual destocking onto the market, with prices dropping by around 5% on average. The price impact would be largest in the EU market, although competition for export sales would mean competing exporters would also see lower prices.  This scenario however, would have the lowest cost in terms of public expenditure.

The use of alternative markets reduces the negative price impacts on the regular SMP market, but would result in lower sales revenues, hence a larger potential budgetary cost.

The report concludes that given the increased market orientation and the observed structural change in dairy markets in favour of milk fat rather than protein, the intervention price level as it is currently defined for SMP may need to be lowered.