The authors suggest New Zealand is moving into a new phase of supply-demand equilibrium where a downward reset is in store for global dairy prices.
The paper reflects on the ending of a period of unprecedented growth (2006-14) that was based on a strong upswing in demand for milk products across Asia.
This occurred on the back of rising middle-income wealth, which led to the complete depletion of intervention stores in the European Union and the United States. With supply still effectively regulated in these markets, it was left to a few export nations to compete.
As prices increased, there developed an assumption that the real price for global dairy commodities would continue into the long term.
However, political interventions in both the EU and US have effectively removed that likelihood.
The removal of milk production quotas in the EU has unlocked the ability of dairy farmers in Central and Eastern Europe to increase scale, and employ technologies not previously available to them.
And in the US the introduction of the Dairy Margin Protection Programme in 2014, which allows farmers to insure against falling milk-to-feed price ratios, is expected to result in more milk production, which cannot be consumed domestically.
Both these measures, say the authors, will have a profound effect on the supply-side of global dairy’s market equilibrium.
Much of the recent debate on suppressed global dairy prices has focused on subdued demand in China (economic slowdown) and in the Middle East (falling oil prices), and the assumption this will be temporary.
But the authors argue an underlying demand for dairy is not assured. Unlike grains, white meat and to a lesser extent red meat, dairy is not a staple food stuff.
In no economy does dairy provide the majority of daily protein intake, and thus dairy is mostly a discretionary consumption item. Therefore dairy farmers, processors and marketers are very exposed to supply-side economics.
As noted in AgriHQ Pulse at the end of last week, Europe’s increased milk production over the past year – 2.7 billion litres more milk in the 11 months to November, higher than the 2.1b litres NZ produced in total during the 2014-15 season – may be the “new normal”.
There was no immediate agreement on the significance of this to the NZ dairy industry, but analysts agreed a continuation of this trend will hurt NZ disproportionately, for being more exposed than other leading global milk producers to international prices.
