Dairy—once the cash cow of the commodities markets—is now firmly in the doldrums.
Having risen nearly threefold from 2009 to 2014, milk prices are now half what they were at their peak.
The plummet came about after farmers increased dairy supplies to try to cash in on an expected surge in demand from China and the Middle East. Unfortunately for them, the ramp-up in demand wasn’t as big as hoped. This left farmers across the globe and big dairy-producing nations like New Zealand experiencing significant pain.
And many worry the worst isn’t over.
“The dairy sector faces difficult challenges,” said Reserve Bank of New Zealand Governor Graeme Wheeler as, in a surprise move, he cut the country’s overnight interest loan rate for banks to 2.25% in Thursday’s monetary policy meeting.
He cited deteriorating growth in trading partners like China and the strength of the New Zealand dollar given weaker export prices along with weaker inflation for the cut.
“Weak global demand has contributed to the slowing in New Zealand gross domestic product from an annual rate of around 4% in 2014 to 2.5% currently. A key [factor] has been a fall in dairy prices, which contributed to a more than 10% drop in terms of trade from their 40-year-high in 2014,” according to the central bank’s statement.
Dairy farmers in the island nation—the world’s largest dairy exporter—are facing their lowest payment for milk solids in 13-years. The resulting slashed farming incomes raise the risk of defaults on farm mortgages and reduce the flood of money into an economy where tourism and education have replaced dairy as the country’s largest export earner.
Dairy prices have fallen as production world-wide has exceeded demand.
In New Zealand, production has increased 32% from 2008 to 2015, while in the U.S. and Australia, it is up 10% since 2009, according to data from the European Union.
The situation got worse when the European Union removed quotas on dairy output in the European Union, where production of skim-milk powder rose 8.1% in 2015 over the year before.
Meanwhile, Russia’s ban on imports of food from the U.S. Australia, Canada and Europe, which started in August 2014, cut off a market for dairy.
The GlobalDairyTrade Price Index—which covers a variety of products and contract periods in the GlobalDairyTrade auction and is a benchmark of global dairy prices—is 20% below its recent peak on Oct. 6, while whole-milk powder prices have fallen 30%. The auction is an international trading platform established by New Zealand’s Fonterra Co-Operative Group.
“The time frame for a rebalancing has moved out and largely depends on production reducing—particularly in Europe—in response to these unsustainably low global dairy prices,” said Theo Spierings, chief executive of Fonterra Co-Operative Group, the world’s largest dairy exporting company.
For farmers, the fall in dairy prices has been difficult.
Dairy farmer Geoff Keeling reduced his dairy herd by 100 cows to 1,400 on his 1,161-acre farm in New Zealand’s South Island to reduce costs. Even so, he says that income from milk is far below what it is costing to operate the farm. If things worsen, he said he would be looking to reduce feed supplements and just feed his cows grass.
“It needs to pick up before the end of next season [May 31, 2017] or it is going to be absolute carnage” in New Zealand’s dairy sector, he said, adding that a lesser-known result has been less money for local services in rural parts of the country. as people have less to spend at shops and restaurants.
Mr. Keeling’s plight is one mirrored around the globe.
Struggling European farmers took to the streets of Brussels in September last year, blockading roads with tractors to demand more support from the central body. In response the EU introduced a €500 million ($559 million) aid package for dairy and pig farmers that included funds to help farmers and money for marketing European dairy.
The EU had already starting buying dairy products at set prices to support rates in the region and had a program in place to entice processors to store products in the hopes of tightening supply.
The EU created public and private stockpiles of skim milk, butter and cheese, leading to nearly 49,000 metric tons of stockpiled skim-milk powder at the end of January. But it has done little to stop the fundamental problem—excessive production.
There is too much product in the market and as a result prices continue to fall. The UK farm-lobby group NFU is warning that a significant number of dairy farmers in the UK might have to go out of business if prices don’t recover, while lobby groups around the region are demanding increases to the intervention policy. An EU Dairy Forum is planned for next week to discuss the issues.
However, short term there is little relief in sight for prices, analysts say.
“There is still a lot of milk in the world compared with where demand is at…So putting a timeline on a recovery is pretty difficult to do,” said Nick Vanderkolk, managing director for HighGround Dairy in Asia Pacific.
Source: Wall Street Journal
