But the impact of weak global dairy commodity prices is expected to be largely contained within the 2014-15 financial year. A price recovery is anticipated which should allow the milk price to recover to near $7/kg milksolids (MS) for next season. This is significantly above the AgriHQ Farmgate Milk Price for the current season, which sits well below $5/kg MS – see AgriHQ.co.nz/toolbox for the latest forecast.
Global milk supplies will contract for a short period from now until the end of 2014 but will expand again early in 2015. The short-term contraction in supply is because northern hemisphere production is at its seasonal low. Supplies will grow again in 2015 as the seasonal increase in milk supply expands in the northern hemisphere. Production in Europe will be constrained by milk supply quotas through to the end of March 2015, but by April we expect a bounce in production in Europe as the more efficient milk-producing nations take advantage of being freed from their quota shackles.
When milk supply slows there is an opportunity for global dairy commodity prices to recover. The last time this happened was in July. Prices were poised to rise but the positive market sentiment that was starting to build was wiped out by Russia’s ban on dairy product imports.
A period of low global prices for dairy commodities does deliver some short-term pain for NZ dairy farmers but it also brings some longer-term benefits. Global prices are lower than the returns on offer in both the US and European domestic markets. When this happens companies often refocus their sales attention on their home markets, particularly in the US. The US is growing its international dairy market presence but they are less likely to push product into new markets when returns are unfavourable. This provides an opportunity for NZ companies to fill the void and regain market share or take a larger portion of the pie.
When global dairy commodities trade at low prices, total global demand for dairy products grows more rapidly. This means there is a larger pie to divide between global suppliers.
A period of low global dairy prices also means dairy products can be imported into some markets at prices considerably lower than what it would cost to produce the goods themselves. China is an example where the internal cost of producing milk is very high by world standards. The farmgate milk price in China currently averages more than NZ$10/kg MS, which makes the cost of manufacturing whole milk powder almost twice as much in China than in NZ.
Susan Kilsby is an AgriHQ dairy analyst.
