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Markets and Brexit Mike Johnston

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

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Markets and Brexit Mike Johnston

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  1. Markets and Brexit Mike Johnston

  2. Markets What’s the story?

  3. 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.

  4. Global Milk Supply Snapshot: Jan – Oct 2017

  5. Global milk supply snapshot: Jan – June 2018 1.8% EU 28 Mixed picture in Q3 1.1% US Higher feed prices 0.8% 0.5% 2.7% NZ July +5.6% Global Continued growth Australia Drought impact in Q3

  6. EU Milk Supply Snapshot: Jan – Oct 2017

  7. +0.6 -1.8 +4.4 Netherlands -1.4% Ireland -0.5% -2.1 +1.5 -0.5 -0.1 +0.4 +2.9 -1.4 +5.5 +3.3 +7.9 +4.1 -0.2 -1.3 +3.7 +0.8-3.0 +7.3 +1.5 +2.9 +13.4 +3.0 +2.4 -1.7 -1.5 +6.6 Source : MS' Communications to Eurostat, FEGA, AGEA,Reg.479/2010.1(a)1 Page - 5-

  8. Global supply Q4 2017 Increasing milk production + 363K tonnes SMP in Intervention = Buyer sentiment: supply not a problem

  9. As at 5 December 2017 €6970 €4360 €4660 €1930 €1698 €1450

  10. 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

  11. Global supply H1 2018 Weather impact EU: Cold March, wet April, hot May, June, July NZ: poor grass growth H2 of 2017/18 season Milk supply increased BUT Not at the rate expected Buyer sentiment: supply might be a problem

  12. RESULT Bullish market

  13. Global supply H2 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

  14. Forward curves falling Indications of bearish market

  15. 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

  16. Global issues Q4 2018 into H1 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

  17. The “B” word What’s the story?

  18. Phases of Brexit Shock Disbelief Possible futures Industry “Asks” Industry engagement Joint Agreement In the dark 191 days to exit UNCERTAINTY UNCERTAINTY

  19. “Read my lips” • EU single market will not be compromised • There will be no cherry picking Consistent EU position.

  20. 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

  21. 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

  22. Irish border: Gordian Knot of Brexit • Still to be agreed • Avoid NI being backdoor into SM • Backstop or FTA • Harmonisation Vs equivalence

  23. 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

  24. “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

  25. “No deal” - issues for companies • Packaging lead-in up to 5 months • What labelling? • Packaging stock run down • November/December selling into Q2 2019 • Tariffs? • Documentation? • Customs controls? • Storage capacity/availability? • Cash flows

  26. Day 1 preparedness • What FTAs will be available? • Animal Health Export certificates? • Tanker drivers? • Packaging /labelling? • Continued operation of all-island value chain?

  27. Works because: • Common standards • No border controls • Robust auditing

  28. Impact of border delays • 30,000 milk tankers/year • Delay costs £1/tanker/min • Assume 1 hour delay each way • = £8.5 m per year • Plus • More tankers @ £140K each • Product quality

  29. What we need • 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

  30. Golf is a good walk spoiled Mark Twain Politics is the art of spoiling a good trade deal

  31. Phases of Brexit Shock Disbelief Possible futures Industry “Asks” Industry engagement Joint Agreement In the dark 191 days to exit UNCERTAINTY UNCERTAINTY

  32. ....... as we know, there are known knowns; there are things we know 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 are also unknown unknowns - - the ones we don't know we don't know. Donald Rumsfeld

  33. ButterSMPWMPCheddar EU wholesale prices Aug 17 – Aug 18

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