Slow recovery for 2016

Global milk supply growth will eventually ease as low milk prices take a toll on production in all parts of the globe. New Zealand farmers have been the first to respond to the depressed milk prices. Stocking rates have been reduced – we estimate by an average of 5% – and supplementary feed use has been cut.
Elsewhere in the world global market signals have been muffled by strong domestic markets. This has allowed processors to pay considerably higher prices for milk than their NZ counterparts. We have seen this situation happen, particularly in the United States and Australia, in the past 12 months.
In the US there is a clear divide between regions that are focused on export markets and those that aren’t. Milk production in California grew by 13% in the decade ending 2014, as the region responded to the growing needs of export markets. However, now prices for globally traded products have crashed so has milk production. Output in California in the second half of 2015 is about 4% down on the previous season. While the lack of confidence by Californian dairy farmers has largely been driven by drought concerns the low milk price has also played its part.
Like most dairy-producing nations other than NZ, Australia consumes more dairy product than it exports. Prices for consumer products are typically more stable than commodity prices, so Australian farmers have been sheltered from the full impact of the downturn in the global markets.
Farmers in Europe are also slow to respond to the global market signals because these signals are distorted both by their own domestic market and a milk procurement war. In 2003 the decision was made to abolish the milk quotas in 2015. This provided plenty of time for EU dairy farmers and processors to plan their dairy expansion. New cow barns and processing facilities were built in the regions where milk production was expected to expand. For many dairy processors this has resulted in a substantial lift in milk processing capacity, and now they want milk to fill those plants, so dairy companies are competing strongly for milk as they try to secure a larger share of the farmgate milk market.
Milk production is still expected to grow in 2016 in the main dairy exporting nations, but the growth rate should be lower than 2015. However, there are tangible signs that milk production is slowing in some of the dairy importing nations, particularly China. The slow-down in China’s domestic milk production combined with stock levels normalising will result in a lift in demand for imported product in 2016. However, Chinese buyers are likely to be a lot more cautious than they were in 2014.
It is important there’s a lift in demand from China because there isn’t another market than can absorb the amount of product that China can. Most other markets in South-East Asia and the Middle East have bought more than they need in the past 12 months. Buyers in these regions have taken advantage of the period of low prices to stock up but now don’t have the capacity to take in more product.
Stocks are high across in many of the dairy importing nations, excluding Russia and China, and are also growing in some of the dairy exporting regions. In Europe skim milk powder fell below the intervention price in early December encouraging product into the government-backed storage scheme.
The European Commission re-opened its annual 100,000 tonne Private Storage Aid (PSA) cheese quota in October 2015. This scheme, which subsidises the cost of storing product, is expected to be filled early in 2016. PSA has typically only been available for butter and skim milk powder, but in late 2014 it was extended to cheese following Russia’s decision to block its borders to European dairy products. However, the scheme for cheese initially lacked detail in its rules and this was exploited by Italy which filled the scheme to capacity within a few weeks of it opening. In 2015 stricter rules were introduced with each country being allocated a quota.
The impact of product moving into these EU storage schemes is expected to have a positive impact on the market in the short-term. The schemes effectively defer supply for up to 12 months. However the downside is prices are never likely to lift substantially while there are high volumes of product in storage.
A slow and steady recovery of dairy markets across 2016 is the most likely outcome – barring any unforeseen supply or demand shock. This doesn’t mean there won’t be some sharp upward and downward swings in pricesalong the way – there’s never a dull moment in the dairy markets.