A restructured management approach that has put more onus on staff is paying dividends for farm managers Isaac and Michelle Johnstone.
The Russian trade embargo, the slowing of demand growth from China, the impact of low oil prices on demand from oil exporting countries and the strengthening of the US dollar have all had an impact on the demand for imports. The expansion of production surrounding the removal of production quotas in Europe added to the pain and resulted in a period of extremely low world prices, according to Rabobank’s report “Strong Headwinds Weigh on Trade Growth.”
“And when we look forward”, says Kevin Bellamy, Global Strategist Dairy at Rabobank. “We see that none of these issues has been resolved. The Russian ban will be in place at least until 2017. Demand from China will continue to grow but at a slower rate, oil prices are forecast to remain at around the USD 50 per barrel mark, and the dollar is forecast to maintain its high value against other currencies. As a result, dairy trade is likely to grow at a slower rate than in recent years, driven more by population growth than per capita consumption increases.”
Luckily, this comes at a time when further rapid expansion of export volumes would be more difficult, with further New Zealand expansion limited by land availability, Europe stabilising after milk quota removal, and the US export ambitions limited by domestic demand growth and the strong US dollar. Dairy trade is also likely to remain dominated by regional rather than global routes with free trade agreements significantly influencing volumes. The exception will be Asia which will continue to be a highly competitive battle ground for exporters from around the globe. All of this must be overlaid with the potential for the renegotiation or cancellation of trade agreements following the US election results.
Much has changed since the last dairy trade map was drawn up three years ago. In 2015, the growth in trade was a meagre 0.3% more than 2014. In the next three years, growth in dairy trade will decrease slightly, due to the strong US dollar, low oil prices, the Russian trade embargo and slowing Chinese growth. China will find a ‘new norm’, which is likely to mean lower volume growth but more focus on value. This will mean that while price volatility is likely to continue, long-run average price increases are likely to be limited. However, at a time of weaker global demand there are also issues weighing on the growth of export surpluses. The strong US dollar and healthy domestic demand growth will mean that the US is less willing to compete in global dairy markets. Despite even moderate US dollar prices transferring into farmgate prices—which incentivises milk production in other export regions due to currency factors—New Zealand production growth will struggle as land availability becomes a limiting factor and in Europe, once production levels have stabilised after the removal of milk quotas, there is no preparation for ‘further’ strategic expansion which would require new land, infrastructure, and processing investment.
But perhaps even more than in recent years we live in uncertain times where the new US administration, uncertain Russian relations, uncertainty in the Middle East, Chinese economic performance, Brexit, and the fate of TPP and TTIP can all have a major effect on dairy trade development.