There have been many false dawns over the past year or so, but it does finally look as though milk prices are beginning to come out of the long downturn they have been going through. The recent Global Dairy Trade (GDT) auction in New Zealand delivered a close to 10% improvement. This followed successive and substantial price increases since August, adding to a sense that the global dairy industry is finally escaping the grip of over-production.
These gains are partly down to Fonterra managing the auction well, but we are at last beginning to see the old adage of ‘low prices being the cure for low prices’ beginning to deliver. The EU’s Milk Market Observatory reported that September had brought “a slowdown in the decline in milk prices” across the EU. That is just about good news, but then markets have to stop falling before they can rise, and we are hopefully getting close to that point. This, however, has to be set in context, and the industry is a long way from being out of the difficulties that it is facing.
Even though it has improved, the New Zealand price is still below the EU intervention price equivalent. China has not returned to dairy markets as the aggressive buyer it was and economic growth has weakened in many of the powerhouse Asian economies, where a growing middle class was driving demand for dairy products. Oil-rich countries have lost buying power because of the low oil price, making them more cost-sensitive when it comes to buying dairy products; and while the euro has strengthened marginally, it is still squeezing prices, and there is no evidence that this will change in the near future.
Recovery will be a lot slower here than those headline GDT results suggest. Suggestions that it will not happen until well into 2016 are probably not too wide of the mark. Even then debts built up over the past year will take a long time to clear, and that means confidence will remain fragile for a long time. Many farmers are facing what is going to be a very difficult winter for managing cash flows, and the scale of that challenge will become clear as the bills begin to rise.
The EU farm commissioner, Phil Hogan, can now point to what is happening globally to back up his claim that there was no case for increasing or reviewing the intervention price. He maintained that markets would correct themselves, and this seems to be happening. That is partly down to how Fonterra has managed the GDT auction and if the EU had been more bullish about intervention it could have supported these efforts.
The focus in Brussels has moved from market support to how to prevent a price collapse on the scale happening again. Mr Hogan is assembling a group of experts to consider how to manage volatility. This group will look in particular at how the dairy industry could hedge prices via an effective futures market. This idea of hedging and perhaps other mechanisms to balance out good and bad prices are going to be the only shows in town.
It is clear now that intervention and export refunds are off the Brussels agenda. The UK dairy industry needs to come up with its own ideas on how to manage volatility, so that from the outset it can be fully engaged in this debate.