Farm Ireland

Thursday 22 February 2018

Analysis: Chinese anti-corruption campaign will hit EU dairy growth

Milk production continues to increase strongly in Ireland
Milk production continues to increase strongly in Ireland
Darragh McCullough

Darragh McCullough

It's hard to be believe that an anti-corruption drive amongst Beijing's political elite would affect a farmer's milk cheque over 8,000km in Ballybay.

Such are the ripple effects of the global market that farmers are now exposed to.

While China is still the fastest growing milk market in the world, dairy products are a long way off being staples for the average Wang Fang - the Chinese equivalent of Mary Murphy.

Back in the good old days of political backhanders for every well connected party stalwart, Mrs Wang found herself with a constantly topped-up giftcard for her nearest Carrefour supermarket. Western brand outlets are the place to go for the shopper that isn't so worried about the price of onions, so to speak. Exotic looking yoghurts, ice-creams and European UHT milk were all part of the mix.

But the Communist Party's diktat on anti-corruption put an end to all that. And according to Rabobank's Chinese dairy analyst, Sandy Chen, that has been part of the big drop in growth in China.

Surely the relaxation of the one-child policy will more than make up for any loss in demand from giftcards?

"There will only be a very modest lift in family size," claims Mr Chen.

"The additional time, cost and anxiety that parents associate with having a second child in first-tier cities [like Beijing and Shanghai] is just too much. Really the interest in having a second child is not high at all among those born in the 1980s."

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It is realities like these that make the business of predicting what lies ahead for milk prices even trickier than getting the 10-day weather forecast right in the middle of an Irish harvest.

However, what we do now know is that milk production continues to increase strongly in Ireland, despite some of the lowest returns ever, and a EU-sponsored scheme offering to pay farmers to reduce output.

However, along with the Dutch, we are unique within Europe in this regard. The brakes are screeching loud on milk output right across the EU, with almost the entire €150m output reduction fund looking set to be gobbled up by the first tranche of applicants. Why wouldn't they when they are being offered over 24c/l to hang up the clusters and take an early Christmas holiday?

Forecasters believe that EU production will be down 2pc this year, and back another 0.5pc next year.

This is at the same time that EU exports are at levels not seen since before the Russian ban was imposed, despite the fact that Putin's EU food barriers remain in place.

Obviously, it's easy to flog product if you are offering it for half nothing, but prices for the key commodities are back at pretty healthy levels.

Butter is back at levels last seen in July 2014 when prices were just coming off all-time highs.

Indeed, Rabobank are mooting a price of over €3,000/t for whole milk powder in 2017 - that's about 50pc higher than what was achieved this year.

Part of the reason for the optimism is that after two years of culling cows and declining investment, it will take most dairy farmers around the world at least 12 months to turn the tap back on again.

Ireland, Holland and the US are the exceptions to that. I saw with my own eyes just how optimistic large-scale milk producers are still in the US - they didn't really suffer the same downturn as the rest of the dairy world at all, and are ready to drive on volumes again on the back of grain that is cheaper than ever.

The others? New Zealand seems to have had a patchy spring in the North Island. Australia's confidence has been rocked by the near bankruptcy of their biggest milk purchaser. South American producers are going nowhere in a hurry, and the Chinese still can't produce milk at less than 47c/l.

Meanwhile, world demand for dairy trundles along, with creeping growth keeping dreams of expansion for Irish dairy farmers alive.

So while Mrs Wang may not be shopping as much in Carrefour or planning to expand the family anytime soon, and it looks like there's going to be less competition for her dairy yuan for the next 12 months.

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