Complexity and speed of change are the two rising challenges facing the dairy sector, says Dr Torsten Hemme, founder and CEO of the IFCN (International Farm Comparison Network) Dairy Research Network in the United States.
Complexity can be navigated if it is understood and speed of change is not an issue unless things get complex. But if these things come together, it is a challenge for everyone in dairying, he said.
“What’s the solution to the challenging market? Well, for us, it’s market intelligence. It is key for everyone – farmers, processors, retailers and farm input companies – to navigate. Market intelligence is needed especially in this crisis,” he explained.
Hemme established the IFCN Dairy Network 20 years ago, and their mission is to help people in dairying to make better decisions.
The network has three pillars, with researchers from more than 100 countries participating in annual data collection and knowledge creation activities. They have more than 140 companies in the dairy world participating and they have a centre in Kiel, Germany, with around 20 employees coordinating the work.
“We have been monitoring a number of crises over the years. Our quote from 2009 was, “we will probably have two to three global crises every 10 years”. So most of the time, we are in a certain type of crisis,” Hemme said.
“We’ve developed an indicator to measure crises, using the world market price of milk based on the commodity prices traded on the world market put into units of US dollar per 100 kilograms of milk, 4% fat and 3.3% protein.”
Using the indicator, they have determined the impacts of the changing milk price across the sector.
“In low-price times we have different actors in the dairy chain and they are hit by the crisis in the following order: the group hardest hit are dairy farmers; number two are all farm inputs suppliers, because their customers are in crisis; and number three are processors, because sometimes, their margins shrink. The same happens to retailers, Hemme explained.
“So that gives you a little bit of an anticipation that a crisis time in the dairy industry is more normal than abnormal, unfortunately. Dairy farmers so far carry most of the load.”
He said the national farm gate price in the US is heavily driven by the world market price and other countries are similar but have slightly different patterns.
For example, Brazil who only imports 3% of its milk and produces the rest itself. But the local farm gate price is heavily driven by the world market.
They were one of the first to be impacted by coronavirus with rapidly falling milk prices which were substantially below the world market.
“When we look at the drivers, oil price is a key driver for everything, and the feed prices have followed the oil prices with a certain delay,” he explained.
“To understand the dairy market, there are connections between markets and there are delay factors. Oil price drives feed price and feed price and oil price drive milk prices. It’s just a matter of a delay.
“Another perspective on drivers of the world market milk price is regional supply and demand as well as GDP.
“The growth of the economy drives demand so looking at the current numbers, this crisis has probably doubled the impact of the 2009 crisis.”
During the current crises, the initial drivers include the panic buying of products followed by a drop in food service demand and an increase of retail sales, which drives prices up or down. It usually drives prices down in most countries.
“In the US it’s really serious because dairy has a huge share of food in the food service industry. We have highly specialised food service processors who could not easily swap from food service products to retail products. That is the root cause analysis which probably has the strongest impact in the US,” Hemme said.
Supply chain disruptions and stocks built up in processing plants and food companies also contribute. Some companies have bought products upfront to ensure delivery, which usually brings stabilised prices or increases them.
“It hasn’t fully hit the market yet. But the biggest driver is we will go into a major recession,” Hemme predicted.
“We will go with lower oil prices which means lower income and lower milk demand growth. That is the biggest impact from the crisis.
“There are also the policies from governments to reduce supply, build up stocks and to stimulate demand. Whatever they do for the short term, it would stabilise the prices.
“The biggest driver to get out of the crisis is probably that milk supply drops due to lower milk prices. Then the downward cycle is done and broken. Then you build up drivers because the more we are under-shooting the normal average price, the stronger we will be later on to overshoot the price and have a price ready.”
Their predictions looking ahead estimate a V shaped recovery, or possibly a U, with a price roller coaster for the next three years. They expect the national milk prices to be impacted from the world market with a delay of one to four months.
In terms of crisis management strategies and tools, there are two basic ways to address it.
The first strategy is to wait and see and apply the existing tools and policies and allow market forces to balance out supply and demand. The second is to start with a new programme.
“At the end of the day, we have two or three dairy crises every 10 years and there is tremendous connectivity between global and national milk prices which are underestimated,” he said.
“There are three phases to crisis and crisis management. There is the way into the crisis, a way out of the crisis, and there is the time after the crisis. Maybe by mid-2021 or 22, we will have time to prepare for the next.”
