“The huge increase in supplies of natural gas and oil in the US and Canada will probably pose a strong risk to future Irish milk price by enabling US milk producers to be competitive at lower prices than before.”
This is according to Cork-based dairy farmer and businessman Mike Murphy, who has interests in America, New Zealand and Chile, and an organiser of Positive Farmers’ dairy conference taking place in Clonmel, Tipperary today.
“Be aware to this risk. Farmers who borrow heavily based on current milk price may be in for a very rough time. Be a little conservative on milk price forecasts,” he cautioned to the packed attendance of more than 475 people.
In terms of US milk production, he noted: “In 2000 the US exported only two per cent of its milk production. By 2012 the US exported 12 per cent of its milk production. So the US is now a major player on the world market.”
He outlined that the US milk supply was at 86 billion litres is 4.5 times greater than the New Zealand supply of 19 billion litres.
“A two per cent increase in US production is broadly evident to a New Zealand increase of nine per cent per year in its effect on supply to the world’s traded dairy market. New Zealand is estimated to grow at 1.5 per cent to three per cent per year. But, with much lower costs for meal and engery; a two per cent increase per year, for many years, in the US is very probable. As US consumption is only increasing very slowly most of its milk will spill out onto export markets. In effect, the costs of US milk producers will determine the global export price for milk. And US costs of production will drop sharply from 2013 levels.”
According to Murphy, the US is set to become the world’s biggest oil nation, passing Saudi Arabia, by 2020, and set to become the largest gas producer by 2018, this will have implications for grain and milk prices as US’s energy policy will change.
“If we look at the present usage of corn maize we better understand the implications of this change of policy. Usages of a typical corn crop of 12.5 billion bushels breaks down approximately to 40 per cent for ethanol, 40 per cent for animal feed and 20 per cent for direct human consumption.
He continued: “In 2013 the US had 91 million acres under maize which produced a bumper crop of 13.9 billion bushels. The increase of 1.4 billion bushels over a more average level of 12.5 billion bushels has led to a sharp, 40 per cent, drop in corn prices.
The sensitivity of world grain prices to ethanol policies and subsidies is very clear, he stressed.
“Given the changes recently introduced to the Renewable Fuel Standard it is expected that corn and grain prices will be much lower worldwide in the next five years. This is very bad news for grain producers worldwide.”
Murphy also said this will decrease our comparative competitive advantage as cheaper meal is of much less value to Irish and UK dairy farmers feeding 300-500 kgs/cow that it is to confinement dairies worldwide who may be at meal levels of 2.5-4 tonnes/cow.
“A likely secondary effect is that cheap meal will lead to higher milk supply from confinement units in the US and this will lower world milk price. This would have a direct knock-on effect on Irish milk price and directly on UK milk price.”
In conclusion, he warned dairy farmers to be aware of this risk. “Farmers who borrow heavily based on current mil price may be in for a very rough time. Be a little conservative on milk price forecasts.”