Dairy Market Blog – 12th February, 2016
A prolonged downturn requiring joined up strategies to help farmers cope
The “perfect storm” of factors which have caused and now prolong the downturn in dairy markets have been well documented: surplus production especially in some parts of Europe, and stock accumulation, combined with a level of demand weakened by the absence of Russia, the lower buying activity and economic performance of China and lower oil revenues of many customer countries.
Many commentators and analysts have expressed increasingly gloomy forecasts of a long lived downturn which could take more than a year to turn around.
We have said it before, those commentators and analysts, no matter how expert in the sector, simply do not have insight into much more than a couple of months ahead. While we need to recognise that demand and supply factors are currently stacked against the likelihood of an early recovery, no one can predict with certainty for all production regions the weather, the reactions of farmers to what is now global negative profitability and the measures enacted by various government and/or industry to support farmers, the geopolitical events which may cut or boost dairy buying, etc.
Meanwhile, this is further proof that, within the trend for volatility, prolonged low returns and prices can be a real obstacle for on-farm and sector thriving, never mind growth.
IFA is currently pressing stakeholders (Co-ops, Ornua, banks, Teagasc) and the Department of Agriculture for joined up support strategies.
This is partly about holding milk prices and providing milk price supports, especially in the challenging early spring.
But it is also about helping farmers with readily available, flexible and well-priced finance for cash flow, keenly priced inputs, favourable merchant credit terms, help with budgeting and viable cost cutting measures which will not undermine the sustainability of the farm or the herd for the longer term. We believe this is the urgent job of the Dairy Forum, which needs to be reconvened rapidly.
Output growth: Europe continues strong
For the calendar year, total output growth for the main export regions is estimated at +1.4%. This is not fundamentally out of line with current demand growth, but it follows from months of strong production growth and stock build up (see below).
Within this, Europe (EU28) is the main contributor with an estimated 2.1% increase for the year. Recent trends have been for continued increases, with November output up 5% on the same month in the previous year. It should be noted that this is relative to a period where expanding EU Member States would have been restraining output due to superlevy.
Europe is followed by the US with output growth of 1.2% (considerably lower than predicted, and with very low increase levels for the more recent months), and Australia at 2.2% (-3.8% for November). Beyond the percentages, it is clear from the first graph below that Europe, the largest milk production region by far, accounts for sizeable additional volumes (over 3m tonnes extra).
New Zealand output is back 1.4% for the calendar year, but for the 2015/16 season June to December, it is down by 4.3%, with an official Fonterra forecast of a 6% fall for the full season, which could go to 7% according to Rabobank. Either way, a lower decrease than was flagged earlier.
A milk price equivalent to 17c/l (19c/l including the Fonterra dividend) is leaving producers in serious loss making situations, and ANZ Bank are predicting that Fonterra may drop its price further.