Backward looking MMO needs to concentrate on the dairy sector’s future

The contrast in the dairy sector over the past 12 months could not be greater. This time last year milk prices were just beginning to come off their peak. Bold investment plans then have created debts that are difficult to service from current milk prices. What the industry needs now is some hope that things will improve, but based on the comments of the European Commission’s Milk Market Observatory (MMO) – set up to monitor prices and trends – the outlook is far from encouraging.

Hopes of recovery rose in December, with a surge in prices at the New Zealand auction. Run by Fonterra and known as the Global Dairy Trade (GDT) auction this is effectively the barometer of world prices for dairy commodities. In early May the price at the GDT dipped again, this time by 3.5% and the expectation is that the auction will continue to bump along the bottom for some time. That means the gains of December and more have now been lost, and there may be no real recovery in dairy prices, even in the autumn. That ties with the conclusions of the MMO.

One of the big reasons for prices staying in the doldrums is that buyers, not least in China, are convinced European production will rise now that quotas have gone. They believe that in that situation they will be able to continue buying as and when they need product, without the cost of holding stocks. They are probably over-reading the outcome, basing their view on countries such as Germany and Ireland, where production will increase dramatically, as opposed to the actual EU average.

The MMO is made up of industry experts from across the EU. Criticism in the past has been that it focussed on reporting what has happened to prices, and not at looking at where they are going. Despite some changes this criticism is still valid. A meeting at the end of April was to assess the response of dairy markets to the end of milk quotas. It confirmed the dip in prices, after a brief recovery, but made no forecast as to when these might improve. It said lower energy and grain costs had helped farm margins, which is true, but this cannot offset the core issue of a poor milk price.

As to European production the actual increase this year, according to the MMO, will be 1.5%. This would probably have been higher if milk prices had been better to justify expansion. The increase in the US is 1.9% and a similar figure is forecast for Australia, while drought will take New Zealand production down by 2%. This is modest, although what the industry really needed was a reduction from high production that flowed from good prices in 2013, and global low prices are not delivering the hoped for plunge in production to make buyers nervous about not holding stocks.

Cheese production has responded well to weaker markets, but stocks of milk powder remain a problem and a drag on European and global markets. The average milk price in the EU is around 32 cents, according to the MMO, which is well out of the intervention zone – but translated into sterling that is now still depressingly close to the 20ppl mark.

As to the future, the MMO has identified where the problems lie with buyer sentiment. Any increase in European production is unwelcome, and the Russian import ban is continuing to cause problems. It is also warning of Russian plans to increase domestic milk production and of the relationships it is building with new suppliers. Both could be long-term threats, but for now what farmers want is an answer to a simple question: when will better days finally arrive for global dairy markets? That information is not yet coming from the MMO.

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