This situation has continued, although fluctuating global dairy production has meant increased price volatility, albeit at higher milk price levels. DairyNZ senior economist Matthew Newman explains.
Global powder prices peaked in this current cycle (in May 2013) with whole milk powder (WMP) prices reaching $5600 US/tonne. However, since April 2014, powder prices declined sharply due to increased production in key exporting countries such as the US, EU and New Zealand, some demand offset following very high prices, and a temporary quiet period of powder demand from China, due to build up of stocks.
The graph below shows global WMP prices and the higher price levels over the last seven years, increased volatility and what appears to be a three-year cycle emerging. WMP prices seem to be peaking every three years between US $4500 and $5600 per tonne.
Only 7 percent of global milk production (644 million tonnes) is traded each year, of which New Zealand accounts for one-third of the export volume.
This means the bulk of dairy product is consumed in the country or market it is produced and a good amount is milk (70 percent). However, traded milk products have a major impact on global milk prices.
Global milk production in 2014 has increased rapidly. New Zealand’s favourable pasture growing conditions increased production by 10 percent for the year ending May 2014.
Meanwhile, US production has accelerated, as low feed prices and high domestic milk prices have encouraged farmers to increase production.
US milk production has risen during the first eight months of 2014, a combined increase of 1.9 percent on the same period last year, adding to US dairy exports.
European milk production continues to be above last year’s. For the first six months of 2014, milk production increased a staggering 5.1 percent following favourable weather conditions (equivalent to 20 percent of New Zealand's annual production). Most of this increased production was processed into powders for export.
The Russian ban on dairy imports from a number of countries has put further pressure on dairy prices. For example, EU milk that would have been produced into cheese for Russia may be converted to another dairy product and consumed in a different market.
Milk production in China declined 6 percent in 2013, as some small farmers culled cows and exited the industry due to increased costs from compliance, forage prices, competing beef prices and foot and mouth disease.
In fact, cow numbers have reportedly declined 10 percent in 2013, adding to the reliance on imported powders.
Although the Chinese Government has introduced regulatory reforms, confidence in locally-sourced supplies of dairy products remains a concern. Consequently, consumers appear motivated to pay premium prices for imported products such as milk powder and milk (primarily UHT [ultra-heat treated]).
Demand for fresh milk in Asia and Central and South America has increased rapidly in the past decade, fuelling strong demand for dairy ingredients, such as milk powders.
But demand for dairy has remained challenging in 2014, as most economies under-performed. China’s milk demand slowed as consumers’ responded to less rapid income growth and last year’s high prices. A build-up in powder stocks also impacted on China’s purchasing.
China’s per capita consumption of dairy products is only one-third of the world average, so this market has significant growth potential.
Over the next five years demand for dairy products looks positive, reflecting a continued shift to western diets in developing countries and rising incomes in the Middle East, North Africa, South East Asia and China.
The trade of dairy products is anticipated to increase to meet Asia’s growing demand, with most of this coming from existing exporters.
Based on the market situation with strong production growth in trading countries and current low grain prices worldwide, dairy product prices are unlikely to begin recovering until the second half of 2015, according to many market commentators.
This means farmers need to adjust from the record milk prices received last year to milk prices nearer $5/kg MS – i.e. survival mode.
The graph above shows the annual New Zealand dairy company payout (including dividend) for milksolids. The gap between the highs and the lows is widening. However, at $5.60, current milk payouts are still within the band of expectations.
Farmers need to prepare their businesses for continued milk price volatility.
Regardless of how low milk prices go, the message is clear – understand your farm business and determine what needs to be done to survive the tough times in order to enjoy the good times.
For many this means having a long-term plan and concentrating on the basics of farming.
Perhaps the next peak could be in 2016/17?
This article was originally published in Inside Dairy November 2014