Why did the dairy downturn happen? And why did no one predict it?

It is impossible to identify a single causative factor for the fall in world dairy prices, but instead the collapse in the market has occurred as a result of multiple factors, according to John Roche of Down to Earth Advice.

Pricing and supply-demand issues have contributed to the worldwide fall in dairy markets, the New Zealand-based Irish man said.

High commodity prices in the recent past have resulted in increased supply with lower than expected demand resulting, he said.

This is a plague of commodity markets where the commodity essentially prices itself out of range, inevitably increasing production on the back of higher price, said the UCD graduate.

However, Dr Roche also added that no one expected the downturn to be as severe.

“That said, let’s be fair, no one expected the extent of the dairy downturn. Three major factors combined to reduce demand.

“These are a reduction in demand in China, low oil prices and the Russia-Ukraine conflict and the associated sanctions and counter-sanctions.”

The reduction in Chinese demand occurred as a result of previously acquired product and reduced economic growth, he said, while the fall in oil prices also had negative consequences reducing the demand from a very significant global dairy importer.

 Future market outlook

The Kerry native added that no one knows the true extent of the economic downturn in China

“No one knows the extent of the economic downturn in China. Are they entering recession, is it a pause, will they rebound?”

But the New Zealand-based dairy scientist added that he believes that the Chinese market will recover but it may be at a slower rate than was evident in previous years.

“I believe that they will rebound, but growth will be much more reasonably paced. Therefore, demand for dairy products will increase, but more slowly than the last decade.”

He also added that oil price looks set to remain low for generations due to the availability of alternative sources of oil in non-OPEC countries and there is no end in sight to the Russian sanctions and counter-sanctions.

US milk production

Dr Roche also added that the US has installed a Margin Protection Programme (MPP), which ensures a margin for unprofitable milk produced.

“This is very significant, almost half of all dairies have signed up to this scheme, but, more importantly, there is greater participation among larger dairies with well over 50% of US milk subscribed.”

He said the impact of this new legislation has not been felt due to the low feed to milk price ratios.

“The impact of this has not yet been felt because of low feed to milk price ratios. However, what it will mean is that the traditional heavy national cull of dairy cows when prices drop is much less likely.

“Therefore, low milk price downturns are not going to curtail American production as it did previously,” he said.

Future milk price

Dr Roche also highlighted that any future rise in milk supply will result in a corresponding increase in milk supply.

“If you put this and quota removal in Europe together, when milk price does rise, so will supply, and we are unlikely to see the lofty heights in milk price of 2013.”

However, according to Dr Roche it is very difficult to predict future milk prices.

“What will the peak be? That’s anyone’s guess. It will probably be between 30-35c/L in Ireland, with premium, composition, and shoulder payments adding up to another 5c at key times of the year.”

“For New Zealand, it will likely be lower (25-30c/L), because it doesn’t have the volume of fluid market to buffer international commodity prices,” he said.