Global dairy markets to remain strong into the summer

GLOBAL dairy markets are set to remain strong into the summer but UK farmers may not see the full benefits because of the way the domestic market operates, according to a leading market analyst.

Patty Clayton, a senior analyst at DairyCo, said the market is currently characterised by strong demand and tight supplies, with little prospect of any immediate change.

Ms Clayton told an NFU dairy producer representative summit, in Warwickshire, that continued growth in China is driving global demand, with imports of milk products up 30per cent in the last quarter of 2012 and a staggering  68 per cent, year on year, in January.

In 2012, China imported nearly $1.4 billion worth of whole milk powder alone.

Meanwhile the weather has played havoc with production in various parts of the world over the past 12 months.

EU milk production was down in all regions except Germany and Poland last year. The UK saw a 4 per cent drop in 2012, with production down 7.5 per cent, year on year, in January and February this year, as the wet weather continued to affect grass quality and the availability and cost of feed.

It is a similar story in Ireland, where production was 4 per cent down in the period between April 2012 and January 2013. 

In the US, drought has been the problem, affecting crops, feed availability and feed prices and resulting in a fall in dairy production.

But the most dramatic effects have been seen in the early part of this year in Australia, which has experienced fires and floods, and New Zealand, where production is forecast to be down by 20 per cent on last year due to extreme drought.

“Production has fallen through the floor in New Zealand. A lot of people have stopped milking, dried off their cows and there has been massive culling. They are sitting and waiting until the spring, our autumn, as it is not economically viable to buy in additional feed so production will be constrained for the next four or five months,” she said.

The combination of these events, particularly the shortage of New Zealand exports to China, has led to strengthening of the global wholesale markets. It is expected in the short term to result in a narrowing of the gap between the product lines, as people take advantage of high prices and divert product to those markets.

“Wholesale markets for powders and fats are going to remain firm going into the summer unless there is a fundamental shift in supply or demand,” Ms Clayton said. 

With demand unlikely to change, any medium-term change is likely to depend on how production recovers in various parts of the world. While there may be a modest recovery in the EU, the ‘big one to watch’ is the US, which has the potential to substantially increase production.

As far as the EU and UK markets are concerned, the weather is continuing to impact on production.

“Spring hasn’t arrived so supplies are still struggling and there is not a lot of milk about in the UK. The EU stock situation unknown but can be assumed to be tight as exports were up last year on back of favourable exchange rates and soft demand in EU,” Ms Clayton said.

The markets are therefore supportive of higher wholesale prices and the markets for milk powder, butter, bulk cream and cheddar have all been rising this year.

“The trend should feed through to the UK and we are seeing some small adjustments to wholesale prices. But in the UK we have factors in our supply chain that can dampen this effect. We have our supply chain issues like the retail contracts,” she said.

“So if it was a competitive free market and retailers were out bidding for product which was in short supply, this would result in increased prices. But the way our supply chain is, it doesn’t happen as freely as that. It takes a bit of time because a lot of our products are sold on contract.”

She concluded the degree to which we see upwards movement in prices in the UK will be partly determined by the availability of imports and exchange rates but could be ‘restricted’ by the balance of power in the UK supply chain.

Readers' comments (2)

  • retail contracts are price manipulation and will fail , sooner the better

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  • lets wait an see how arla milk link price responds to these factors,as amba price is linked to this.

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