Friday, 12 May 2017 07:56

Production growth in major markets

Written by  John Droppert
Local analysts suggest confidence is increasing in NZ. Local analysts suggest confidence is increasing in NZ.

It’s been widely reported by now that dairy markets are in a somewhat balanced phase.

Product supply has retreated as farmers worldwide respond to low prices, and demand has recovered thanks to those same low prices and a general rundown of inventories in key markets – especially China.

Neither force has been enough to create a major price shock, so although some products (butter and skim milk powder) are trading at significant premiums or discounts to average, the overall market is somewhere in the middle.

Price shocks are, by their nature, difficult to predict. They’re usually brought on in turn by climatic, economic or political shocks, or by commodity bubbles.

But the everyday ebbs and flows of supply and demand can also add up to unbalance a market. Milk supply is often where this happens, given that the lagged response to market signals (caused by the nature of farming as a biological system).

By the time the milk is produced and sold, the demand conditions that generated those prices have changed, and if everyone responded the same way at the same time, the overall response is effectively an overreaction.

The better the view of what’s happening in the market, the less chance there is of overreacting.

The European Union has for some time now been the elephant in the room in regards to milk production. The removal of quotas, coinciding with the loss of its largest market (Russia) and a broader commodity price trough have seen much attention focused on Europe in recent years.

More recently, policy measures such as payments for farmers to reduce production, and the much-publicised Dutch dairy cow cull have led to suggestions that European milk production will fall sharply.

Then there was the impending seasonal flood of milk through the northern hemisphere spring, that put downward pressure on commodity prices. 

So far in 2017, the reality has fallen somewhere between the extremes. Milk production has been relatively steady – around 1% below 2016 levels in February, and commodity prices have steadied after early-year losses.

The intervention program has reopened, and skim milk powder is once again entering government storage, but many reports thus far indicate that only some contracts are trading at the floor price level.

Nonetheless, eight rounds of tenders have failed to sell more than 40 tonnes of the 350,000 plus tonnes in storage, and the 109,000 tonne ceiling for this season is likely to be reached by the end of the spring. 

The European Commission expects that milk production across the 28 member states will grow by 0.3% in 2017 – with per-cow production growth offsetting a likely fall in the herd size.

Due to domestic demand growth, the United States hasn’t been too much of a concern for dairy exporters in recent years. But US milk supply continues to expand, and local analysts have reported milk being dumped in at least four states and regions, with manufacturing capacity insufficient to deal with growth in production.

Not surprising when you consider that in the last five years, US milk production has only posted negative year-on-year growth for six individual months (out of 60).

Only one of these months has been in the last three years. March data shows 1.6% year-on-year growth in milk volumes for that month, in part due to there being 0.5% (15,000 head) more cows in the national herd.

Whilst herd expansion is only part of the story, the USDA is forecasting that there will be another 25,000 cows producing milk by the end of the year; farmers are in expansion mode and more milk is on the way.

Most of this growth is concentrated in the southwestern states (Texas, Arizona, New Mexico). The rule of thumb in the US is that when ‘revenue over feed costs’ is greater than US$7.50/cwt for six months or more, milk supply expands.

March marks the ninth consecutive month that this has been the case, with recovering milk prices and a continuation of low feed costs driving profitability. For the full year, the USDA expects milk production to grow by 2.5%, compared to 2016, implying a total of around 99 billion litres.

Closer to home, the oft-employed strategy of trying to pick market direction based on New Zealand’s milk production has proven a difficult one this season.

The drop in production following a wet spring turned out to be somewhat smaller than originally forecast, with March production (up 10% compared to March 2016) appearing to herald a big finish to the season.

As it happened, this was just in time for Cyclones Debbie and Cook to hit in April and shorten the season for a number of farms in various parts of the North Island – though at the industry level the damage is limited.

With milk prices looking reasonable for a second season in 2017/18, New Zealand’s farmers are finally putting two years of extreme cash flow pressure behind them, and local analysts suggest confidence is increasing.

That said, many farmers have significant ground to make up in rebuilding their businesses, and combined with ever-tighter environmental regulations stifling new dairy developments, growth in milk production is unlikely to reach the double digit rates of years past.

The bottom line? Milk supply is not likely to contract this year, so in the absence of a significant shock, we won’t see any material supply-driven gains in commodity prices.

It isn’t expanding significantly either, but farmers in most regions are ready to capitalise if given incentive to do so. As a result, the expectation is that we’ll see competitive pressure keep commodity prices around current levels for some time yet.

John Droppert is Senior Industry Analyst with Dairy Australia.

More like this

Mobile calf shed inspired by chooks

"I looked at my neighbour's farm and thought, I can do that," said Rohan Bingley.

'That' was replicating the caravans used to house chooks on the neighbouring free range egg farm. Mr Bingley was looking for a solution to raise his dairy calves.

Moving from Bega to Gippsland to pursue dream

A fierce desire to grow their equity, and the unpredictability of the Bega seasons, has seen Tom and Gemma Otton take up a share farming role with Peter and Jeanette Clark at Kongwak.

Are your milking practices "normal"?

Recent milking time visits to a number of different dairy sheds have reminded me that “normal” means different things to different people.

More from this category

Fonterra taps into Chinese ‘consuming class’

THE SCENE: downtown Beijing.

Beside a bus stop in a cluster of ordinary local shops is a bakery called Wei Duo Mei, open 6.30am to 9.30pm, seven days a week.

To Australians a bakery is no big deal, but to China’s rapidly increasing ‘consuming class’, or new wealthy, the bakery is something special, an opportunity Fonterra has been quick to exploit.

New Fonterra China farm taking shape


EARTHWORKS HAVE started on Fonterra’s new $42 million dairy farm in Yutian County near Beijing.

Project manager Kim Mashlan told Dairy News Australia the perimeter fence is complete and other work is in progress. But during the three months of winter progress will be limited.

A2 builds Sydney plant

A2 Corporation plans to build a $10 million processing plant in Australia after receiving $4 million via a share placement.

Domestic consumption rises

The past decade has seen many changes in the Australian dairy industry and none more significant than in the way milk is used in the various states of Australia.

Making money from acid whey waste

BOOSTING VALUE from whey could earn Australia’s dairy industry millions and improve sustainability, says the winner of a big industry prize. 

The recent move by Coles to slash private label milk prices to $1 per litre has caused a huge stir in dairy circles during the past month.

AS THE current season draws to a close, many farmers in southern Australia will be turning their thoughts toward the 2011/12 season and the opening price announcement.

ONE OF Australia's oldest and largest dairy companies is tipping increased financial strength for shareholders and more development opportunities after it is publicly listed on the Australian Stock Exchange in July.

AS ANOTHER season draws to a close; milk prices come 'top of mind' as farmers assess how they've ended the year and put together operating plans and budgets for next season.

Exasperation at years of low milk prices drove South Australian dairy farmers Barry Clarke and Geoff Hutchinson to take charge of their own destiny.

Leave a comment

Make sure you enter the (*) required information where indicated.\nBasic HTML code is allowed.

» Get social

When butter and chocolate collide

TWO New Zealand companies Lewis Road Creamery and Whittakers have teamed up to deliver what must be every dairy lover’s dream: chocolate butter.

» E-Newsletter

Subscribe to our mailing list

* indicates required