How long can this downturn last?
This, and “how low can prices go”, are probably the main questions on dairy farmers’ minds this month. As yet, there is no certain answer. While Rabobank takes a pessimistic view that an upturn will have to wait well into 2016, there are very good reasons to believe a rebalancing of supplies could happen sooner, and bring with it a recovery first in dairy product prices, and then in milk prices.
What is clear, however, is that this will take some time. What no-one can predict in any way accurately is how long that is.
In today’s blog, I propose to examine why we are where we are, and what the factors are that may get us out of it sooner rather than later.
“Old milk” and production momentum the main current cause of imbalance
Some of the extra milk produced during 2014, benefiting from strong milk prices and good production conditions, remains available in the system in the form of product stock. Also, the momentum of production created by the strong profitability and good production conditions experienced by producers in all milk production regions continues to carry a slight surplus production over demand – though this is dwindling rapidly in most regions.
Global supplies are estimated to be only up 0.7% for the first 5 months of 2015 compared to the same period last year. Much of this additional production originates in the US – where it is mostly consumed domestically – with strong demand for butter and cheese in particular. Australian and New Zealand production have made more modest contributions to the oversupply over that period (see graph below).