Economic view: 'Substantial' milk price recovery in 2016 predicted
I was reading an article this week suggesting that the El Niño effect in the Pacific would definitely cause a hard winter in Europe, followed by a late and wet spring.
Following the previous predictions of barbecue summers or snow-filled winters I remain sceptical of our ability for long-range weather prediction. However, thinking back to the terrible spring and summer of 2013 did serve to remind me of the difficulty in accurately predicting milk production and therefore prices for raw milk further than a couple of months ahead.
Naturally, for all those who - post the abolition of milk quotas - have invested in additional production capacity on their farms, the likely price next season is crucial. The 2015 season has finished with low prices not seen since 2009, global dairy commodity prices continuing to fall, and average fines of around €4k for over production in the final year of milk quotas having to be paid. This means that predicting the time of a price recovery in the world dairy market is of great interest.
The recent further falls on the New Zealand Global Dairy Trade (GDT) market, while appearing to be further bad news, may be actually more a reflection of currency changes than a continuation of global market doldrums.
While the falls earlier in the summer were almost certainly caused by Oceanea processors trying to clear their stocks at low prices, the more recent falls have more to do with the weakening of the euro against the US dollar. Since quotas were removed in April, European milk production has jumped by 2.3pc (April-Sept). In fact, the milk production growth from Ireland (12.7pc) and Netherlands (8.5pc) accounts for more than the other 26 states put together.
In a normal year the need to find a market for the additional 1.7 million tonnes of milk since April would have caused prices to crash to disastrous levels.
But, this is not a normal year as the euro has continued to weaken against the dollar, EU exports have continued to gain - skimmed powder up 10.2pc year on year and butter up 27pc year on year. Cheese has not shown an increase (down 4.8pc), but even here, most of the volume which would have been sent to Russia in previous years has been absorbed by market growth for EU cheese in the South Korean market.
With world markets operating in US dollars as the euro has weakened, European suppliers have been able to continually sell at ever lower US dollar prices, making EU exporters highly competitive. The currency change also explains why EU suppliers continue to sell on the world market rather than into intervention (see graph). The dollar value of SMP on the world marker has remained just above the SMP intervention price, which has fallen in US dollar terms as the euro has weakened.