The quantity of milk being produced in Europe far exceeds previous expectations.
The countries adding the most in volume terms are The Netherlands, Germany and Ireland. In December, The Netherlands milk intakes expanded by 17% year-on-year. Dutch farmers are producing so much milk it has prompted dairy company FrieslandCampina to provide farmers with an incentive to supply less. The company simply doesn’t have enough capacity to process more milk, despite investing heavily in processing equipment before milk quotas were abolished.
FrieslandCampina has elected to pay its farmers an additional €2/100kg in the period from January 1 to February 11, 2016, if they keep their milk supply below a certain level.
While some European farmers are being paid to not supply milk, Argentina’s government has decided to incentivise production. This would not be the first time Argentina’s economic policy was at total odds with the rest of the world.
In Argentina direct payments are now available to farmers with the purpose of encouraging milk production. Subsidised loans are also available for farmers requiring aid. But Argentina, like all other exporting nations, is struggling to find a market for its milk.
In the second half of 2015 Argentina relied heavily on Venezuela to provide a market for its whole milk powder. Argentina picked up the slack when other countries elected not to supply Venezuela because of the economic turmoil the country is in. New Zealand last sent a shipment of milk powder to Venezuela in August 2015. But with Venezuela boasting the world’s highest inflation rate even Argentina and Uruguay are no longer supplying dairy products to this nation. The International Monetary Fund estimates Venezuela’s inflation was running at 275% in 2015 and anticipates this will rise to 720% this year. With oil prices languishing at about US$30 a barrel it is unlikely the Venezuelan economy will recover any time soon, given oil accounts for 96% of the country’s export revenue.
Before the rise of China, Venezuela was NZ’s largest market for dairy products. Its importance waned in recent years but it is still an important market, particularly during periods of global oversupply.
The wealth of many of the relatively new markets for dairy products is tied to income generated from the sale of oil. Other dairy importing nations whose income is highly dependent on oil include Nigeria, Russia, Brazil, Saudi Arabia, United Arab Emirates and Algeria.
Seven of the ten largest markets for NZ dairy products last year derive significant levels of revenue from oil. But while a low oil price does not bode well for the health of the global economy the demand for dairy products from these oil nations is a little more resilient. This comes from governments wanting to avoid any social unrest that comes with food shortages. In countries such as Algeria a government body controls the volume of milk powder imported. This milk powder is then reconstituted into liquid milk and packaged for consumers. Keeping stores stocked with food staples such as milk helps prevent social conflict which often occurs during periods of economic downturn.
Low oil prices also means freight costs are reduced. This is particularly helpful when shipping products such as UHT milk which are considerably more bulky than milk powders.
Milk powder prices are suffering to a much greater degree than milkfat products. This is one of the reasons farmgate milk prices in some markets have not retreated nearly as much as they have in NZ. In the United States butter prices have come off the lofty levels achieved in 2015 but prices in their domestic market are still 40% greater than prices elsewhere. The strength of this butter market is helping to keep farmgate milk prices at twice the level NZ farmers are being paid.
Farmgate milk prices in Europe and Australia are being assisted by their domestic markets in which they sell value-add products to consumers. Many European processors are also running on thin margins as they settle into the postquota era while trying to appease their suppliers. This has resulted in average farmgate milk prices being about 40% higher than NZ levels. Many farmers also supply milk on a set-price contract and therefore are fully exposed to market conditions only for any excess milk they produce, which then must be sold at spot prices. This type of forward contract provides a degree of certainty for both the processors and farmer, although prices for many of these contracts are revised on a monthly basis.
