Dairy market recovery rests on three key events
The past year saw one of the most sustained periods of low prices seen since world markets crashed in 2007/08 yet the market has remained stubbornly over-supplied.
A recovery in dairy prices to more sustainable levels for the whole supply chain is needed but, when this will happen, and how quickly, relies on a combination of three key events, according to an analysis by AHDB dairy:
- A reduction in milk production
- The sale of excess stocks
- A rise in demand.
The AHDB says milk production in the main producing regions (EU, New Zealand, Australia, US and Argentina) has grown by around 2% annually over the past five years, which is around 5 billion litres more milk per year.
It says up until the early part of 2014, the demand for dairy products in countries such as China and Russia was able to absorb most of the increased output, supporting prices.
However, the disappearance of the Russian market in the summer of 2014, combined with the stock build-up in China reducing its dairy import needs, meant demand was suddenly too low for the rate of growth in milk production.
According to the AHDB imports by China and Russia in the 10 months to October 2015 fell by around 50% compared to the same period in 2014.
It says this represents just under 400,000t of product, or the equivalent of more than 3.5 billion litres of milk.
The AHDB says in its analysis that this imbalance in the market saw average global prices for dairy products, based on Fonterra auction results, drop by 6% through 2015.
‘Supplies continue to increase’
Milk supplies, however, continued to increase, according to the AHDB fuelled primarily by growth in the EU resulting from the removal of quotas in April 2015.
With a large chunk of import demand taken away by China and Russia, the excess milk has ended up as accumulated stocks.
The AHDB says EU stocks of skimmed milk powder (SMP) and cheese are reported to be at their highest levels in at least five years while US commercial stocks of milk powders hit a record high in the summer of 2015.
According to the US Dairy Export Council, there were approximately 400,000t of milk powder in inventories as of December 2015. This amount of stock represents just under 20% of annual imports of milk powders, the AHDB says.
The net impact of developments in production, stock accumulation and import demand is that, while some areas are starting to show a slowdown in production, the market continues to be burdened with too much milk, according to the analysis.
It says forecasts for 2016 suggest growth in US and EU milk production although it is expected that the EU will grow at a slower rate, while NZ is expected to produce anywhere from 3%-6% less milk depending on the impact of the El Niño on grazing conditions.
According to the AHDB, how much extra the EU produces in 2016 will be largely dependent on the spring peak and quality of grazing, with most of the retraction in milk supplies not expected to occur until the second half of the year.
Meanwhile, It says while demand for dairy products is expected to continue to grow at a global level, predominately in developing countries, the stock levels will need to return to more normal levels before we see a sustainable recovery in prices.