Milk price volatility looks like it’s here to stay

Over the years, from the era of milk marketing boards to the privatisation of the industry, one big attraction of dairy farming has been stability. Farmers have always had the certainty of a monthly milk cheque, which is something many of their fellow farmers envy; unlike arable farmers, dairy farmers don’t have to risk making a mistake over the timing of when they sell what they produce – and they’re removed from the gambling game that beef production has become because of the price squeeze exerted by supermarkets.

In recent years, however, dairy commodity and milk prices have become more volatile and less comfortably certain; and while the industry enjoyed a long price upturn until two months ago, it’s now witnessing falling prices. The signs are that this should be a short-lived dip, rather than a slump, but there can be no question that price volatility is here to stay.

The reason why prices have dipped is a mix of the two factors that drive global markets. These are old-fashioned supply and demand, and the impact of currency – in particular the strength of sterling against the euro and the US dollar. This has made suppliers in the eurozone, including the Republic of Ireland, much more competitive in export markets.

Global markets are also paying the price for the euphoria months of good prices brought. This led to a big increase in production, particularly in Europe and New Zealand. Making matters worse, China decided it had sufficient stocks for the next few months and stopped buying. This created an over-supply on global markets, with an inevitable impact on prices.

The good news is that the latest Rabobank dairy market forecast is for prices to improve over the coming six months. This is because production is moving back into balance, while it’s also inevitable that China will return to the market in the not too distant future.

What makes current poor prices all the more frustrating is that the weakness of global markets is being used by supermarkets here to exert price pressure on the domestic market. They need this to fund the price war they’re engaged in with their competitors, and the global dairy market has helped create the conditions for them to squeeze dairy farmers and processors.

This is all happening as the European Commission finalises its plans for the end of quotas next year. It’s already clear that the Commission will get its wish for a light-touch regime when quotas end. The trend will be for milk production to move to the regions best suited to dairy farming, and into larger, more efficient herds. The Commission’s hope is that because production will move towards those that are bigger and more efficient they’ll be able to survive financially when global prices hit their lows.

Time will tell whether this optimism is justified, but no one should have any false hopes that Brussels will ride to the rescue if some farmers find they can no longer viably produce milk in a quota-free world.

Quotas haven’t been an issue in the UK for many years, but for others – most notably Ireland – there’s a huge pent-up pressure to increase production. However this seems to be the exception rather than the norm. Only Ireland, Austria and Denmark are on course for big production increases, according to Commission forecasts. While these might look big in percentage terms, scale means that in an EU context the increases will be relatively modest – probably less than a 3% production increase across the EU, which Brussels says will be easily absorbed by an expansion in cheese production.

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