Archive for New Zealand Dairy Industry

Dairy Market Dynamics: Key Insights on Global Milk Production, Export Trends, and Price Movements

Get critical insights on milk production, exports, and prices. How will these affect your dairy business? Read our expert analysis now.

Summary:

The dairy industry is amid significant shifts and uncertainties. In August, New Zealand’s milk solids production increased by 10%, while U.S. headline milk production dipped slightly by 0.1% but saw a component-adjusted rise of 1.8%. On the downside, New Zealand’s exports and Chinese imports fell short of expectations, declining by 13% and 2.8%, respectively. The market’s behavior has been erratic: Whole Milk Powder (WMP) prices rose more than anticipated, yet prices for most other products have remained steady or dropped. U.S. butter stocks exceeded forecasts again, even as illnesses like bird flu and Bluetongue pose risks to production in various regions. Are we witnessing a market pause before a final bullish push, or have we passed the peak? The answer may vary by product and region.

Key Takeaways:

  • New Zealand’s milk solids production showed a robust increase of 10% in August.
  • U.S. milk production slightly decreased by 0.1%, although component adjustments indicated a 1.8% rise.
  • New Zealand’s exports fell by 13% in August, signifying lower-than-expected performance.
  • Chinese imports weakened, dropping by 2.8% in the same period.
  • GDT Pulse saw a notable increase in whole milk powder prices, contrary to the steady to lower trends for other products.
  • Concerns about unsold butter stocks continue, with U.S. butter stocks in August larger than anticipated.
  • The U.S. cheese market experienced turbulence, with buyers stepping back, leading to falling prices for blocks and barrels.
  • NFDM/SMP prices softened in both the U.S. and EU, signaling a bearish shift in market sentiment.
  • Seasonal and global factors such as bird flu in California and Bluetongue in Europe affect production and market stability.

Imagine sailing a ship through choppy waves; that’s how the dairy market feels. Milk output is increasing in specific locations while decreasing in others. Export patterns are altering, with unanticipated changes in essential markets such as China and New Zealand. Prices? They are fluctuating more than ever. Understanding these processes is not simply necessary; it is critical. This article will examine the most current worldwide milk production figures, export patterns, and price variations. Let us get you ahead of the curve.

CategoryRegionChangeRemarks
Milk Solids ProductionNew Zealand+10%Better than expected
Headline Milk ProductionU.S.-0.1%Component adjusted +1.8%
ExportsNew Zealand-13%Weaker than forecast
ImportsChina-2.8%Weaker than expected
Butter StocksU.S.N/ALarger than forecast

Milk Production Trends: Navigating the Shifts in New Zealand and the U.S. 

As we look at worldwide milk production patterns, two key areas stand out: New Zealand and the United States. Recently, New Zealand recorded a remarkable 10% rise in milk solids output in August. This increase in production is more than just a figure; it is a vital sign of the country’s thriving dairy industry, which continues to set the pace for global milk supply.

In contrast, headline milk output fell 0.1% in the United States in August. However, when controlling for components, the image changes, suggesting a 1.8% gain. This complex change shows that U.S. milk’s quality and richness have increased, although total volume may seem stable.

What do these developments mean for the worldwide market? With New Zealand boosting production, milk prices might fall as supply matches or surpass demand. However, the situation in the United States adds another degree of difficulty. The rise in component-adjusted production suggests that the United States may compensate for volume by producing higher-value goods, such as premium cheeses and specialized dairy components.

These processes have various geographical implications. For example, rising New Zealand exports may pressure European markets, increase competition, and change price tactics. Meanwhile, the U.S. market’s emphasis on quality over quantity may position dairy goods as a specialty, premium offers, shielding them from worldwide price volatility. This means that even if the overall volume of U.S. dairy exports remains stable, focusing on high-quality products could potentially drive up prices in specific markets.

Overall, the interaction between volume and value in these crucial areas emphasizes the significance of strategic manufacturing and marketing. Dairy farmers and industry experts should pay particular attention to these patterns, as they will likely affect market movements and opportunities in the coming months. By staying focused and adapting your strategies, you can confidently navigate the changing dairy market.

Global Trade Dynamics: New Zealand’s Export Decline and China’s Import Drop

New Zealand’s latest export statistics indicate a dramatic 13% fall, surprising many, considering the market’s usually positive outlook. What does this signify for the world supply? Dairy goods from one of the world’s top suppliers are becoming more scarce.

Meanwhile, China’s imports have dropped by 2.8%. While this may seem minor initially, it has far-reaching repercussions when considering China’s status as a significant dairy consumer. A drop in Chinese demand might indicate shifting consumer habits or economic forces.

What does the combined dynamic of decreased exports from New Zealand and lower imports into China mean for global supply and demand? For starters, if supply exceeds demand, the market may soften. This change may temporarily lower prices for dairy customers. On the other hand, manufacturers may face narrower margins and financial constraints.

Unexpected Surges Amidst a Shifting Dairy Market: Analyzing Whole Milk Powder’s Leap 

The latest pricing fluctuations in the dairy sector have caused quite a commotion. Whole Milk Powder (WMP) has seen an unexpected price increase on the world stage, contradicting industry expectations. This increase in the GDT Pulse index has left many questioning if we’ve entered a new market trend or whether this was an outlier. Other dairy goods, like cheese, butter, and powders, have consistently reduced costs, indicating a change in the market.

Why did WMP grow when others stagnated or even declined? Let’s look at some critical elements. First, New Zealand’s milk solids output increased by an astonishing 10% in August. While additional supply might cause downward pressure, worldwide demand for WMP from developing markets may have absorbed this extra volume, sending prices upward. In contrast, component-adjusted milk output in the United States increased by 1.8%, showing adequate supply levels.

However, the broader market may be cooling down. Cheese, for example, saw U.S. stocks fall 6.4% from the previous year, and lower-than-expected August statistics did nothing to boost sentiment. Buyers backed off, lowering prices for blocks and barrels as offers dried up.

Butter prices also fell, finishing at $2.79 ($6,150/M.T.) on the CME, the lowest level since March. Market observers may ascribe this to a variety of things. One explanation is that domestic demand was front-loaded early this year, resulting in less hunger today. Furthermore, larger-than-expected U.S. butter supplies in August boosted the perception of a well-supplied market, reducing pricing pressure.

Powders, notably NFDM and SMP, have softened in the U.S. and E.U. markets, with CME futures taking a significant knock. Since the beginning of September, attitude seems to have moved to a pessimistic stance. This shift may be attributed to lower global trade dynamics, as seen by New Zealand’s 13% export reduction and a smaller-than-expected 2.8% drop in Chinese imports.

These dairy market fluctuations indicate that, although specific sectors, such as WMP, are experiencing unexpected growth, others are dealing with supply and demand adjustments. Is the market merely pausing another boom, or have we reached the peak? Only time will tell—along with rigorous monitoring of output, stockpiles, and global commerce.

Market Sentiment: Breather or Peak? 

Let’s discuss the market mood. Are we merely taking a break before another push higher, or have we reached the peak? Currently, it’s a mixed bag. U.S. butter supplies were higher than predicted in August, possibly due to a spike in domestic demand. That is hardly the bullish signal that many were expecting.

However, there is more at play. Bird flu is quickly spreading across California, which is a significant concern. The same is true for Bluetongue in Europe. These variables will undoubtedly impact output and, as a result, pricing in the future. While specific markets may be slowing down, others may experience more activity.

The critical issue is whether we’ll see another spike or settle down. It’s a difficult decision. On the one hand, the continuous year-end Christmas demand usually results in higher pricing, as consumers tend to buy more dairy products during this festive season. On the other hand, rising stock levels, notably in butter, signal that the market may have peaked and is now poised to rebalance.

So, we are at a crossroads. Is this the quiet before the storm or the start of a plateau? Only time will tell, but remaining watchful about these vital aspects is essential for making educated judgments in the coming months.

U.S. Cheese Market in Flux: Buyer’s Strike Creates Uncertainty 

The current state of the cheese market in the United States has several opportunities for analysis. Recently, U.S. cheese purchasers took a considerable step back, effectively going on strike. This move reflects strategic prudence due to dropping pricing for cheese blocks and barrels. Rising offers and a noticeable lack of bids mainly caused this week’s fall. The attitude indicates resistant purchase behavior as buyers wait for better market circumstances.

New figures show that U.S. cheese supplies were 7 million pounds fewer than expected in August. They fell by 6.4% from the previous year, which was accentuated by the downward adjustment in July. This decline points to a more precarious supply position than previously thought. Lower supply typically raises prices, but the present buyer strike has disturbed this natural market reaction.

So, what does this imply for the U.S. cheese market? Lower stock levels often indicate increased market pressures, which might contribute to future price recoveries. However, the current price situation may worsen if buyers stay on the sidelines. The power dynamic has altered somewhat; sellers are dealing with demand uncertainty.

The market is tug-of-war between current supply limits and buyer reluctance. As we proceed, the price volatility risk remains substantial, determined by how soon and to what degree buyers re-engage. The cheese market in the United States may continue to be volatile due to changing purchasing habits and underlying supply dynamics.

Butter Market Puzzles: Is the Seasonal Trend Buckling? 

Turning our focus to the butter market, recent developments have left many industry observers perplexed. CME spot butter ended Thursday at $2.79 ($6,150/M.T.), its lowest price since early March—a notable development given seasonal tendencies. Typically, we anticipate butter prices to climb as we approach the end-of-year holidays due to increasing demand.

But what’s behind this surprising decline? One potential reason is that domestic demand was higher than usual this year. Perhaps customers stockpiled up significantly earlier this year, expecting price increases and supply chain problems that still need to materialize. Consequently, a slowdown in buying may be placing downward pressure on pricing.

The future of the butter market remains to be determined. Seasonal tendencies indicate that costs should rise as Christmas baking and cooking increase. Still, current market dynamics raise doubt about this tendency. Factors such as current avian flu outbreaks in California and bluetongue in Europe may affect supplies further, possibly hiking prices.

However, we must also examine whether the market is resting before another upward surge or if we are nearing the conclusion of a bullish cycle. Late-year demand will be critical to monitor. Will customers empty their stashes, forcing fresh purchases, or have we reached a corner?

Powder Market: Shifting Sands and Emerging Challenges 

Powders have also seen notable changes. The costs of nonfat dry milk (NFDM) and skim milk powder (SMP) have fallen in both the United States and the European Union. This isn’t just a slight adjustment; CME futures have dropped significantly over the last two days, signaling a substantial shift in market opinion. Since September, the prognosis has shifted to the pessimistic side, particularly in the U.S. This move raises various issues.

Are purchasers speculating on future oversupply? Perhaps recent production increases in New Zealand and the United States have addressed some of the supply limitations that had previously driven prices higher. How does this affect dairy producers and suppliers?

Price cuts may have a double-edged effect. On the one hand, reduced prices may stimulate demand, clearing stockpiles. However, as input prices rise, manufacturers may face narrower margins. If prices continue to fall, stakeholders must plan for probable financial difficulties or seek cost-cutting strategies to retain profitability.

The hostile move indicates deeper market concerns about maintaining higher prices in the face of variable output and unpredictable demand patterns worldwide. If these price declines shake market confidence further, we may witness a market correction or a longer-term trend. Only time—and the forthcoming Christmas demand—will tell if this negative mindset persists or shifts back to positive.

Seizing Opportunities in a Complex Market: Your Game Plan 

The present market dynamics are complex, but if you look at your business, you will find several chances. Begin by adequately controlling expenses, such as bulk purchasing feed and conserving energy. Diversify your goods beyond milk, explore using technology to increase production, and keep up with market developments. Create financial resilience via contingency savings and avoid high indebtedness. Finally, prioritize quality; better items often result in higher pricing and more devoted consumers. In 2024, flexibility and proactive initiatives are more than just buzzwords; they are required to be competitive in the ever-changing dairy industry. Stay aware and agile, and always seek operational efficiencies.

The Bottom Line

The present dairy sector environment shows a combination of stronger-than-expected milk output in New Zealand and the United States, comparatively weak Chinese imports, and volatile commodity prices. The strike in the U.S. cheese market and the sudden fluctuations in butter and powder pricing show the unpredictability of dairy markets. Consider how these trends may affect your daily operations and bottom line as the year advances. Are you ready to negotiate these changes, or must you adapt your methods to remain ahead? The future of the dairy industry depends on our capacity to adapt and make sound choices. What actions would you take to guarantee that your firm flourishes in the face of global market fluctuations?

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New Zealand Dairy Powerhouse: Record Milk Production and Rising Profits

New Zealand’s dairy industry is setting new records with increased milk production and higher profits. What does this mean for dairy farmers and the market?

Summary:

New Zealand‘s dairy sector is experiencing significant growth this season, with milk production and solids up 7.6% and 8.3%, respectively. This growth is fueled by favorable weather in the North Island and a strong performance by Fonterra, which has announced increased milk prices and substantial dividends. August saw a rise to 2.9 billion pounds of milk due to ideal conditions, and Fonterra’s final milk price for 2023-24 at $7.83/kgMS, with a proposed 55¢ dividend. The updated Farmgate milk price for 2024-25 is expected to range between $8.25 and $9.75/kgMS. The industry is set for continued prosperity with rising global dairy prices and free trade agreements.

Key Takeaways:

  • Milk production in New Zealand is up by 7.6%, and milk solids are up by 8.3% compared to the previous season.
  • Fonterra announced a final milk price of $7.83/kgMS for the 2023-24 fiscal year, with a dividend of 55¢ per share.
  • The forecasted farmgate milk price for 2024-25 ranges from $8.25 to $9.75/kgMS, indicating a positive outlook.
  • New Zealand dairy prices are rising, driven by global market trends, with recent skim and whole milk powder prices hitting significant highs.
  • Focus on the business-to-business segments of Foodservice and Ingredients suggests strategic shifts within Fonterra.
  • Producers are experiencing higher paychecks due to favorable market conditions and increased milk production.
New Zealand dairy industry, milk production increase, Fonterra milk price, dairy profitability 2023, global dairy market, free trade agreements, skim milk powder prices, dairy employment New Zealand, geopolitical impact on dairy, Kiwi farmers profits

Have you ever wondered what it takes to produce approximately 2.9 billion pounds of milk monthly? That is precisely what New Zealand’s dairy farmers did in August, setting a new industry standard that is not just impressive, but also significant. Furthermore, milk solids increased by more than 10% over the same month last year. Kiwi dairy farmers are reaping the rewards of their hard work, as shown not just by statistics. What does New Zealand’s increasing milk output and profitability imply for you and your business?

MonthMilk Production (Billion Pounds)Milk Solids (Million Pounds)YoY Change in Milk Production (%)YoY Change in Milk Solids (%)
August 20232.66248
August 20242.92739%10%

Three Months In New Zealand’s Dairy Sector Breaks Records

Only three months into the milking season, there has been a considerable increase in output—milk production is up 7.6%, and milk solids are up 8.3% from the 2023-24 season. That’s a massive jump for the industry!

To put things in perspective, Kiwi cows generated roughly 2.9 billion pounds of milk in August alone. That is a massive 9% rise over August 2023. Milk solids increased by 10% from the previous August, reaching over 273 million pounds. According to Dairy Market News, the increase in output is primarily attributable to excellent weather conditions on the North Island.

These figures are more than statistics; they represent New Zealand’s dairy sector’s strength and promise. With such encouraging data, producers have reason to be enthusiastic this season.

Ideal Weather: The Secret Sauce Behind North Island’s Milk Surge 

What’s causing the fantastic increase in milk quantities, particularly on the North Island? It is primarily due to the weather, a factor that we should all appreciate. Favorable weather can make or break a season, and Mother Nature has been exceptionally kind this year. The mild temperatures and abundant rains have created an excellent climate for pastures to thrive. Good pastures result in healthy and productive cows, and this is a significant factor in the industry’s current success.

You know how a rigid feeding regimen might affect milk supply, right? The natural availability of high-quality fodder has decreased the need for additional feed, saving farmers money and providing cows with better diets. This combination of high-quality pasture and cheaper feed costs paves the way for greater milk output.

Furthermore, a consistent environment decreases stress for the animals. More constant circumstances result in fewer extremes, which may harm a herd’s health and output. Happy, healthy cows generate more milk. It’s a simple yet profound equation: more excellent weather = higher pastures and milk yield.

Imagine running a dairy farm without regularly dealing with adverse weather. This degree of consistency significantly contributes to the record-breaking productivity we are seeing. Consequently, New Zealand’s good fortune with the weather has immediately translated into larger tanks and better yields.

More Milk, More Money: Fonterra’s Record Payout to Kiwi Farmers

It’s no secret that more production frequently results in bigger paychecks, and this season’s record-breaking productivity is no exception. Let us break it down: Fonterra has set a final milk price of $7.83 per kilogram of milk solids (kgMS) for the 2023-24 season, a strong figure already indicating excellent profitability. In addition, the company is proposing a 55¢ dividend per share, potentially increasing total profits to $8.38/kgMS for producers.

CEO Miles Hurrell expressed his satisfaction, stating, “Despite a drop in earnings from fiscal year 2023, we maintained the positive momentum in fiscal year 2024 and delivered earnings at the top end of our forecast range” [source]. The cooperative’s method is paying off handsomely for Kiwi dairy producers.

Looking Ahead: What’s Driving the Updated Farmgate Milk Price for 2024-25? 

What is driving the latest farmgate milk price for the 2024-25 season, which is expected to range between $8.25 and $9.75 per kgMS? The results show a 50¢ gain at both ends of the spectrum, indicating a surge of confidence in the business. But there’s more to this tale.

For Fonterra, this pricing approach is more than simply good fortune. It demonstrates a robust and strategic emphasis on their B2B areas, such as Foodservice and Ingredients. By focusing on these high-margin sectors and divesting some of its worldwide consumer brands, Fonterra hopes to improve its financial health and provide even higher returns to its members.

So, what exactly does this imply for you? Higher prices indicate more active markets and demand, resulting in more significant wages. North Island’s output miracles may become the norm if weather conditions remain favorable. That’s not just excellent news; it’s a bright future for dairy producers trying to make the most of their efforts.

Global Trade Winds: Navigating New Zealand’s Dairy Boom

The global dairy market is dynamic and constantly evolving. With its recent increase in milk production, New Zealand plays an important role. Have you considered how international trade agreements and geopolitics influence our industry?

New Zealand’s global influence is also evident in its free trade agreements, including those with China and the Pacific Alliance. These agreements provide access to markets with lower tariffs and restrictions, a significant advantage in the complex dairy sector. For example, tariffs imposed by Middle Eastern nations on European Union (EU) dairy exports create opportunities for New Zealand to fill the gap, demonstrating the country’s global reach in the industry.

However, not everything is smooth sailing. Geopolitical disputes between key global entities such as the United States and China increase market instability. These conflicts may impact everything from taxes to shipping routes, disrupting trade operations. Nonetheless, New Zealand’s dairy industry has proven its resilience, successfully navigating these rough seas and enhancing its worldwide status. This resilience should reassure us all about the industry’s future.

But how does New Zealand’s dairy industry rank globally? The island country is famous for its high-quality, grass-fed dairy products, which have grown very popular. Countries turn to New Zealand for quantity and quality, particularly whole milk powder and butter.

In a situation where global demand for dairy is expanding, New Zealand’s capacity to produce more milk while strengthening trade links puts it in a strong position. The potential for future growth is exciting, especially when other areas struggle with decreased production. This optimistic outlook is something we can all look forward to.

Will New Zealand continue to set records and surpass its competitors? Only time will tell, but the present signs seem encouraging.

Riding the Wave: A Look at Global Dairy Prices 

Let’s discuss global dairy pricing. There has been a considerable increase over the previous several months. Skim milk powder, for example, reached its highest price since February 2023 at last week’s sale. Whole milk powder prices rose dramatically, reaching more than $3,400/MT in two of the previous three Global Dairy Trade events. That is the highest level seen since December 2022.

So, what exactly does this imply for New Zealand? Kiwi dairy prices are somewhat lower than worldwide norms but benefit from the global price spike. This tendency might be beneficial for New Zealand’s growers. Despite increased output, global supply remains limited. If this trend continues, prices might rise even more, increasing earnings for New Zealand’s dairy producers.

Milking Prosperity: Dairy’s Crucial Role in New Zealand’s Economy 

Dairy is a significant contributor to New Zealand’s economy. Have you ever considered how important this industry is? Let’s go into some numbers. The dairy business employs more than 40,000 people and indirectly supports 50,000 jobs. Dairy production employs roughly 5% of the country’s workforce.

The industry’s contribution to GDP is similarly substantial. In 2023, the dairy industry contributed roughly NZD 18 billion to New Zealand’s GDP or almost 6% of total economic production. The economic impact is even more significant when you include the ripple effect on allied businesses like feed, equipment, and transportation.

Exports are where the dairy business thrives. Dairy products account for around 28% of New Zealand’s total exports, bringing in more than NZD 20 billion yearly. Dairy accounts for over one-third of New Zealand’s total export revenue. It is not an exaggeration to argue that dairy’s success feeds the whole economy.

Would New Zealand be the same without its thriving dairy industry? Certainly not. The industry’s high productivity and considerable export value are critical to ensuring economic stability and expansion. With global dairy demand increasing, the success of New Zealand’s dairy farmers is inextricably linked to the country’s economic fortunes.

The Bottom Line

The dairy sector in New Zealand is celebrating several remarkable successes. The near future is positive, with milk output and solids much higher than the previous season, and the excellent North Island weather is facilitating this expansion. Fonterra has sweetened the deal with record rewards and a strong projection for the next season, indicating a positive outlook. Rising global dairy prices also help Kiwi farmers, indicating even higher profits.

The excitement around New Zealand’s dairy industry is undeniable. But, with global industries constantly altering, one has to wonder: Can New Zealand maintain its rising pace in the face of global uncertainties?

Learn more: 

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Say Good-Bye to Supply Management

For years the topic of Supply Management has been a hot button issue for dairy producers around the world.  Those who operate under a supply management system, such as the one in Canada, are strong advocates for the program.  While those that do not, such as New Zealand, Australia, and the US, tend to look at it with envy and even disdain. Recently there has been a lot of international talk about supplying of the supply management in the dairy sector.  The EU is removing supply management and the US government, who was  proposing a supply management system,   removed it in their most recent farm bill (Read more:  Dairy Farmers from Across the Nation Oppose Supply Management and  Compromise Reached: Supply Management OUT of Dairy Policy in Farm Bill).  With world trade becoming a greater and greater reality for all countries, it is only a matter of time before supply management, as we know it, no longer exists.

With that in mind we decided to take a look at the Canadian Supply Management System and the resulting impact, if it were removed.  Canada’s Milk Supply Management System was created to solve milk surpluses and low returns to farmers.  Understanding how this policy originally came into practice helps explain its longevity.  And understanding how the system works in practice points to the pressures it faces today.  These include astronomical quota costs, unanticipated dairy imports and globally uncompetitive pricing.  The system has had to evolve to address a range of domestic and trade changes.  The current milk supply management operates under three “pillars”: production controls (quota), administered pricing, and import controls.  As conditions have changed, regulations under supply management have changed.  It has been broadly successful in doing so, but its complexity has created operating costs and burdens for government and the dairy industry. Furthermore, with a more global economy, it has recently become a stumbling block in Canadian government world trade talks.  (Read more: Are We Playing Hide and Seek With Supply Management? and  Why the Future of the North American Dairy Industry Depends on Supply And Demand).

What’s the Story around the World?

Comparing Canada to the rest of the world, we find that New Zealand and Australia are at the highly market-oriented end of the continuum.  Canada is at the highly protectionist end. The U.S. and Netherlands/EU are in between.

Canadian milk production has been essentially constant since the mid-1970s and is actually down compared with the early 1960s.  At the same time, milk production in the U.S. has increased steadily.  In Australia, it has increased markedly following policy changes, prior to recent years when widespread drought limited production.  Netherlands dairy production increased steadily before quota controls were imposed in the 1980s and it has been relatively steady since, with a recent increasing trend.  New Zealand’s milk production is significantly up.

And what about milk pricing?  The national patterns diverge to a degree.  The available data suggests that prior to the mid-1980s, milk prices in the countries considered here broadly increased.  Canadian milk prices have continued to increase since the 1980s.  In the U.S. prices abandoned their trend of increases in the 1980s and have since become more volatile, consistent with the reduction in support pricing.  Similarly, in the Netherlands, the increasing price trend ended in the late 1980s.  Milk prices in Australia increased through the 1980s and plateaued in the 1990s. However, with the recent super market price wars, the price for milk in Australia has been extremely volatile.  New Zealand has seen a trend of higher prices and increased volatility, with some similarity to Australia.

Say Good- Bye to Supply Management - figure 1

Figure 1 presents divergences in milk pricing, using the U.S. as a reference.  The chart plots monthly P5 Eastern Milk Pool27 (Canada) blend milk prices versus U.S. Federal Order blend prices for New York/New Jersey and for the Upper Midwest since 1997.  Milk prices in Canada are generally much higher than those in the U.S. Over that period, the eastern Canadian price averaged $C63.05/hl, while the U.S. Midwest price averaged $C39.42/hl and New York/New Jersey averaged $C44.31/hl.  Moreover, because U.S. milk prices are much more volatile than those in Canada, the price differential is commonly wider than these averages suggest.  For example, the price spread between eastern Canada and the Upper Midwest U.S. has frequently exceeded $C40/hl— more than the average value of the Upper Midwest price itself. (Read more: Canada’s Supply-Managed Dairy Policy: How Do We Compare?)

The key advantage that Canadian producers have enjoyed over its peer countries is that fluid milk markets are characterized by seasonality that creates surpluses, which are diverted to industrial milk markets and thus result in lower industrial milk prices.  Sudden losses of export markets exacerbate domestic surpluses and depress milk prices.  Under persistent surpluses, with their associated inequities and low returns to farmers, the initial response is to mitigate adjustment through 27 The P5 Eastern Milk Pool is an interprovincial pooling agreement among Canada’s eastern provinces (Ontario, Quebec, Nova Scotia, New Brunswick, and Prince Edward Island) mandated pooling systems and more interventionist policies, such as price supports, product surplus removal programs, and production quotas.  These are eventually reduced or eliminated due to their cost burden.  The industry then adjusts, resulting in market growth.  Canada has not experienced the same pressures to reduce or eliminate interventionist policy that its peer countries have, so Canada continues to use certain approaches that its peers have dropped.  Nevertheless, industry adjustment has occurred in Canada, but without the market growth seen elsewhere.

Therefore, while Canada has not seen the growth that other world markets have, it also has not seen the extreme volatility that those other markets experience.  This stability is very much appreciated by Canadian milk producers, despite the high cost of entry and production (Quota, and Quota financing costs).

The World is Changing!

After 30 years in a supply management system the UK has now abandoned it.  Moreover, the EU as a whole is pushing for other countries to remove supply management as well.  (Read more: Canada May Drop Cheese Tariffs to Access EU Beef Market and Canada’s dairy farmers ‘angered and disappointed’ by EU trade deal that would double cheese imports).  This is causing great pressure for Canada to follow suit.  As the Canadian government seeks to open trade for all industries, especially Oil, Lumber and Beef, that access often comes at a cost. In Canada’s case that cost is opening up the Canadian dairy market.  More competition will mean that Canada’s high milk costs will have to go down thus decreasing the net return to producers.  While I don’t foresee the abolishment of the quota system immediately, it will happen.  As Canada opens up its markets to the world, that means that the Canadian government will have to further subsidize the milk price or allow the milk price to drop.  As the Canadian government is already running tight on its fiscal position, they are not likely to subsidize this system for very long.

While no one is arguing the benefits that supply management has had for the Canadian dairy farmer, that protection has come at a cost.  One of the greatest costs that I don’t think many realize is that it has allowed many producers to become complacent about their operations.  They have not been forced to be as efficient as possible.  Those that have been the most complacent are the ones who are going to feel the greatest hurt as Canada continues to open up access to world markets.  For those Canadian dairy farmers who think that the Canadian government will protect them till the end….what about the beef farmers, lumber and oil industry?  How can the Canadian government afford to protect and grow the market for all of them?  Everything has a price. (Read more: Save Frank & Marjorie Meyers Farm – The Army Is At The Gate & This Farmers Number Is Up!)

As a clarification point, while supply management as we know it is threatened, there is no question that the Canadian government is committed to a strong domestic agricultural industry.  Many other countries, including the European Union and the United States enact policies that subsidize (directly or indirectly) domestic production. This is something Canada does not currently do.  As the world market evolves, the Canadian system may have to move toward global markets and away from supply management.  It is also important to note that Canada gives more access to imported products than many other countries give in any single sector. Canada currently imports over 6% of the market for dairy products and more than 7.5% for poultry.  In contrast, the United States gives only 2.75% access to their market for dairy products and Europe offers a mere 0.5% for poultry. These will all be areas that will be addressed as world trade evolves.

The Bullvine Bottom Line

The world is rapidly moving to a free market economy.  This highly market oriented system will mean that those producers who can produce milk the most cost effectively will excel and those that are not efficient will perish.  Canada and its quota system that has done an amazing job at protecting its producers are most likely to be the hardest hit by these global forces.  Producers that are looking to the next generation need to seriously evaluate their operations and become as efficient as possible as fast as possible.  The message is clear.  Canada will be saying goodbye to the current supply management system.

 

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