Milk processors must take long-term view and not panic

Milking time: Supply exceeds demand on the global market.
Milking time: Supply exceeds demand on the global market.

Pat McCormack

AS supplies exceeded demand in 2014, dairy prices have decreased. The announcement of the Russian ban in August certainly didn't help. The other shadow is the prospect of massive super-levy fines for farmers. Taken together, we're looking at some serious challenges that I'd prefer to see the EU Farm Council get to grips with sooner rather than later.

But market sentiment is probably more negative than it should be. Dairy prices have and continue to be in a strong position globally.

For example, the lowest price paid across the EU in July was 35c/l, while the highest price was almost 46c/l. Almost 40c/l was paid in the US, and more than 30c/l in New Zealand. These figures show that the Irish processors were paying the lowest price in the EU in July and this fact needs to be recognised.

So why all the negativity? It's clear that global supply is still outpacing demand, and that the Russian ban has caused a market shock for eastern European producers.

But it's also worth noting that, even with growing global supplies, volumes were being marketed successfully up to the Russian ban. It's also worth noting that there has been some slowdown in global milk production since July. In fact, EU milk production is likely to fall back between now and the end of milk quotas.

In addition, spot quotes and Fonterra's Global dairy Trade auction has shown some signs of stability in recent weeks as Russia sources dairy products from other parts of the world. This should present market opportunities for EU countries in other areas, provided that they have the capacity to sell into these markets.

Low feed prices in the US may boost milk production in the short-term, but futures markets suggest that the margins over feed costs in the US are likely to decline in 2015, which should lead to a reduction in milk supplies.

Finally, it's most unlikely that the current spell of ideal weather conditions globally will stay favourable for too much longer, and any change would see global milk supply fall back relatively quickly.

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There is a clear responsibility on the EU Commission to act because the political sanctions related to Russia are the main reason for the current negativity.

Farmers cannot be expected to take the hit for the political decisions behind the Russian sanctions and the CAP budget cannot be expected to take the full burden of losses arising from the sanctions.

The impact of the Russian ban is still unclear and it may be a short-term. While Aids to Private Storage have been introduced, this simply kicks the can down the road.

What is actually required is a strong export initiative targeting markets displaced by the Russian ban. That export initiative needs to be supported immediately by export refunds to ensure that the product is sold at a price that will leave a realistic return for the producer.

The decision of some processors to set milk price at more than 35c/l for August is certainly encouraging and ICMSA firmly believes the picture for 2015 can be positive, even if it does appear uncertain now.

Milk processors across the EU need to take a long-term view and avoid panicking in the coming months.

Pat McCormack is the ICMSA deputy president and dairy chairman

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