Short of a significant weather event hampering New Zealand, Indian or USA milk output over the coming months, the Irish Dairy Board (IDB) believes that farmgate milk prices in Ireland will come under further pressure during the second half of 2014.
“It’s all about supply and demand,” Joe Collins, Managing Director of IDB’s Dairy Trading & Ingredients division told Agriland. “Demand for dairy products is increasing by about 2.5% per annum and that figure is likely to remain constant during the period ahead. However, we have seen global milk output increase by 4.9% over the past six months, with the result that production is significantly outstripping demand at the present time. The net result of all this is pressure on farmgate prices, which we are now seeing materialise.”
He went on to confirm that 2014, to date, has been the perfect milk production year in a global context and added: “Here in Europe a mix of warm weather and rain has served to boost milk production. Meanwhile in the US the recent sharp drop in feed prices has served to encourage a similar trend in dairy output expansion. The tumble in grain prices has been triggered by higher stocks, excellent new crop prospects and the fact that the growth in corn volumes being directed towards bio-ethanol production is less than expected due to low gas prices. This development in energy prices is being driven by the emergence of fracking as a new energy-sourcing technology in that part of the world.
“All of this brings the prospect for milk production in Oceania centre stage. If weather conditions in New Zealand and Australia are conducive, in terms of encouraging milk output, then global dairy markets will come under further price pressure in the run up to Christmas as there are currently adequate stocks in the system. In an oversupply context, downward price movement is the only factor that will help limit dairy production, assuming that weather and other production related factors do not step in to alter the dynamics of the market. Dairy farmers in New Zealand are highly dependent on milk from grazed grass.
“So, in reality, it may well take either drought or flood conditions to curtail Southern hemisphere milk output over the coming months. Global milk prices increased last year on the back of a significant fall-off in production from mid-2012 to end Q2 2013 which was mostly weather related, and the ongoing growth in demand for dairy products. This scenario is now moving quickly in the opposite direction, given the production response that we have witnessed, internationally, starting late 2013/early 2014. Back in January the IDB Purchasing Price Index stood at 133.6. The June figure was 121.5 and could go lower over the coming months. The big imponderable is the impact which the New Zealand and USA dairy industries will have on world markets.”