In the short term price signals can be ignored but over the longer term something must give, hence NZ’s milk supply is now slowing. Elsewhere in the world the signal to reduce supply has been faint, and in some cases inaudible, so these countries aren’t cutting milk output. Returns are also being assisted by low feed prices helping to keep milk supply ticking over in countries such as the United States and Australia.
The removal of milk quotas in the European Union was expected to result in an increase of milk supply of about 1%. However, the reality was the surge in milk supply has been a tsunami rather than a manageable wave. The European Commission as recently as October had forecast growth in milk supply of 1.2% this year. However, for that to occur we would actually need to see a drop in milk production across the final four months of 2015.
The increase in milk supply was coming from the regions where supply was expected to increase the most – Ireland, Netherlands, Germany – but we are yet to see a substantial slowdown from the less-productive regions. Ireland is leading the milk supply expansion charge, growing at 9.2% this year, but the Netherlands is expected to show the most growth in volume terms. The Netherlands alone is expected to increase its milk supply by as much as the US in 2015, when considered in volume terms. Europe’s largest milk producer – Germany – will also add significant volumes of milk.
The combined contribution from Ireland, the Netherlands, and Germany is expected to be about three times larger than the reduction in milk supply from NZ.
Global dairy demand typically increases by about 2% a year, so growth in milk supply is required to meet this demand. Even with the substantial growth coming out of Europe, the growth in milk supply across the globe will probably be less than this for 2015. The issue of over-supply this year has been compounded by global demand being constrained because of China and Russia importing fewer dairy commodities.
Russia’s dairy inputs have halved since they imposed a ban on imported product from most western nations. The ban, initially imposed in August 2014, is expected to be in place until at least August 2016. (Dairy Exporter, November, p30). A little more product from NZ might find its way into this market now Russia has reapproved supply from most Fonterra plants, but there are plenty of non-tariff barriers which inhibit the flow of product into this market. The direct impact on NZ from Russia buying fewer dairy products is not large, but the indirect effect of displaced European product now competing in NZ’s markets is huge.
China has taken a long time to rebalance its dairy markets since its buying spree in 2013 and early 2014. The oversupply issue is compounded by a lack of transparency and reliable data on China’s stocks of dairy products and its domestic milk supply. Also compounding the issue is the fact that China is really a conglomerate of separate markets. Much like Europe is made up of a large number of countries, China is made up of many different markets that have differing characteristics and operate independently of each other.
China’s domestic milk market was over-supplied earlier this year and farmgate prices dropped. In some instances it was virtually impossible to find a market for raw milk. But farmgate prices have stabilised and there are even signs that they are starting to move back up. This is very encouraging as farmgate milk prices are a much more accurate way of measuring raw milk production than any statistics produced.
If China’s milk supply is slowing then demand for imported product should pick up in 2016. However, it won’t be only NZ dairy companies looking to supply this market. European suppliers are becoming very well versed in this market and have some advantages over their NZ counterparts. The richer Chinese consumers are demanding product that is packaged outside China. Products like liquid milk and infant formula command a high premium in China compared to products that are manufactured in China, even if the raw ingredients have been imported.
High-speed rail links between Europe and China will also assist European exporters to move their product efficiently into China, particularly into the interior, which is more difficult to service than the coastal cities.
