Farm Ireland

Thursday 27 October 2016

Milk price could fall further without more co-op supports

Kevin Bellamy

Published 06/04/2016 | 02:30

Irish dairy farmers, in cost of production terms, are among the most efficient in the world.
Irish dairy farmers, in cost of production terms, are among the most efficient in the world.

The rest of the world's dairy farmers are blaming the Irish (and perhaps the Dutch) for the critically low prices they are suffering.

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There is little appreciation that the Irish dairy farmers who, in cost of production terms, are among the most efficient in the world have as much right to produce milk as any New Zealander or Californian producer.

It is true that much of the additional milk that flowed on to the world market from Europe did emerge from Ireland (+8pc year on year between April and January) and Netherlands (+4pc year on year between April and January).

Production has risen more slowly elsewhere in Europe. But where it has been possible to generate a 'cash return', if not a 'profit', farmers have done so.

The short term outlook is not great.

Returns from commodity markets where much of the Irish production heads is still only around 26c meaning that either cooperative boards will need to continue to dip into reserves to support prices, or there is room for further weakening of prices at the farm-gate.

Indeed, in our quarterly forecast constructed by our dairy analysts around the globe and published this week, we remain pessimistic in the short term.

Global dairy commodity US dollar prices have continued to stumble along a market floor largely determined by the level of EU intervention support.

That means that the short-term outlook for farm prices remains pessimistic even if, in the face of a cripplingly long price trough entering 2016, growth in the world's milk production regions continues to slow.

However, in the longer term we have become more optimistic.

With the exception of Brazil - gripped by the worst recession in a generation - and Middle East and North Africa which are affected by low oil prices, demand among other dairy importers has strengthened. At the same time slowing production growth will be matched by slow, but steady consumption growth in most main export regions.

As we look forward we see a gradual tightening of supply.

In Europe, low farmgate prices will mean production growth will slow as farmers focus more on cost-saving than expansion.

However, while European production growth will moderate, production levels will not fall, requiring the world market to find a new pricing balance in the longer term.

In New Zealand, the 2015/16 season production will be around 4pc down on last season, even though this is higher than expected due to increased summer rainfall.

In the US farm-gate prices and therefore production are likely to move down in response to weakening trade balance and growth in inventories.

Australian margins

And in Australia tight producer margins will choke off any supply growth. Finally, in Latin America, increased feed costs partially caused by the freeing up of Argentinian trade in soya and grains will force up costs of milk production and reduce output.

On the demand front worse-than-expected production in the second half of 2015 has led us to cut our China production forecast for 2016.

Low prices have choked off new farm investments and smaller producers continue to leave the sector.

At the same time, low consumer prices and heavy promotions in the run-up to the Chinese New Year have re- inflated consumption. Most South East Asian countries are also seeing higher consumption figures.

We need also to remember, while the outlook has become more pessimistic in the longer term, both public and private stocks have been growing in the US and Europe and any recovery of prices would be 'overhung' by the need to work through these inventories.

We should also not get carried away with slightly more positive news.

At present we are forecasting prices of perhaps $2500 for Whole Milk Powder on the world market. This is over 20pc up from today - but hardly the $5000+ we saw as recently as 2014.

Kevin Bellamy is a global dairy strategist with Rabobank

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