Global milk production surges and the milk price crashes

For those following milk prices, milk production and changes in the dairy industry, the last month resembles watching wild seas crashing into breakwater or rocky coast.

In Australia, the news that one of the major exporters – Murray Goulburn has not only realised that the price forecasts promoted by its CEO, were not attainable, BUT it has told its farmer suppliers and owners that it has overpaid them and is seeking repayment of this money.  Fonterra, which is hurting badly in New Zealand has followed suit and dropped their prices.

It must be remembered that maintaining the processors is critical to the survival of the industry.  Collapsing processors such as has happened recently in Western Australia and other places leaves honest people out of pocket and in dire straits.

In a separate set of circumstances in Western Australia, several farms have been told by their contracted processor that their contracts will not be renewed and it is believed that several more are to receive the same news!  The rival processors are not taking the milk as they do not want the milk either! this is the first time that milk in Western Australia does not have a purchaser.

The shocks are severe to all concerned

Dairy farmers run biological systems that can’t be ramped up or down easily.   They deal with live animals that need care and feeding daily and in the case of milking cows – they need milking at least twice a day.

The farmers could have made adjustments if they had known!

Why is there a problem?

There are a number of completely separate international issues developing, which affect international milk production and demand.

1:    Production in the USA is growing, buoyed by the margin protection programme. This programme as its name suggests protects farmers from negative margins (making a loss).  Then there is the “Cooperatives working together” programme that uses farmer contributions to subsidise exports.

Their website on 16th of May 2016 states

“So far this year, CWT has assisted member cooperatives who have contracts to sell 19.008 million pounds of American-type cheeses, 7.716 million pounds of butter (82% milkfat) and 18.113 million pounds of whole milk powder to sixteen countries on five continents. The sales are the equivalent of 481.287 million pounds of milk on a milkfat basis.

These programmes promote extra milk production with the Federal Agricultural service (FAS) estimating 1 billion litres more being produced in the USA in 2015.

2:    EU milk production quotas were removed in April 2015.  There was a prediction that milk volumes would surge – these predictions have come true!  The map on page 2 of the Directmilkdpo website shows it graphically.

The European commission features excessive milk volume growth and the fact that storable dairy products are going into intervention right now in their short-term outlook.  Some great maps and graphs from the European Commission can be seen here.

Analysis of increased production in the EU in the calendar year 2015 are equal to the TOTAL PRODUCTION VOLUME OF AUSTRALIA.

While there will be  internal growth in the EU, the extra volumes are significant.   A rough analysis of publically available milk production figures indicates that the increases in Ireland, Holland, Germany and Poland are MORE THAN the total volume of milk produced in Victoria in 2015

There are reports from Germany that milk prices have been cut savagely.  This will help reduce the glut as will the reduction in volumes due to reduced prices in Australia and NZ.

There is some hope in the fact that in the first quarter of 2016 China has imported more “Whole Milk Powder” and “Infant Formula.”

However it should be noted that the prices paid for whole milk powder are still low.   The most recent price records indicate that prices in the vicinity of US $2,400 are common.   These prices are well below the 10-year average

These production surges and price crashes will test resilient dairy farmers to the maximum.

It is unlikely that the economic climate will change rapidly and several years of pain may be the case.