Too much milk, too little thought: EU expert

New Zealand has to share responsibility for the global market milk oversupply, says European industry expert.
Andy Jackson

New Zealand has to share responsibility for the global market milk oversupply, says European industry expert.

New Zealand is partly to blame for the global market glut of milk and associated depressed price because it has kept pumping out increased volumes for years, believing the market was endless, says a European dairy industry specialist.

Barry Wilson, editor-owner of UK subscription publication Dairy Industry Newsletter, said if all the farmers in New Zealand and Europe who were moaning about low milk prices got out of the industry, it would be healthier for their exit.

"You in New Zealand are producing too much milk, we in Europe are producing too much milk, certainly for the last year. All I say to farmers in New Zealand and Europe who are whinging is get out of the industry and leave it to those who can make money at the sort of prices they are getting at the moment. We are not going to see those prices increase hugely," said Wilson, speaking from France where angry farmers are demanding the reinstatement of Europe's production quota system, lifted in April last year.

Wilson said dairy farmer numbers around the world declined each year. Twenty years ago there were 35,000 dairy farmers in the UK. Today there were 12,000. To survive, those that remained got bigger.

"You don't hear farmers with 1000 cows moaning, because they are making money. In California a producer of 10 million litres a year is doing well. I bet there are farmers in New Zealand making money even at today's prices. Farmers in Britain with 500 to 1000 cows are making money.

"Because your currency is devalued, the price of wholemilk powder on GDT (GlobalDairyTrade auction) is down 40 per cent, but in reality the price is down 23 per cent. You're doing well with your currency, which will probably continue to devalue (against the United States dollar)."

Wilson's comments come as the ANZ, the country's biggest rural lender, predicts a milk price of $5 a kilogram of milksolids for next season, and as dairy specialist economist Peter Fraser cites a potential "new normal" industry milk price of $5/kg with a $1 variance on either side.

ANZ lowered its milk price forecast for the 2015-2016 season to $3.90/kg earlier this month. Fonterra, which collects 86 per cent of the country's raw milk, recently revised down its milk price forecast to $4.15/kg. DairyNZ says the breakeven point for the average farmer is $5.40/kg.

ANZ chief economist Cameron Bagrie told a Waikato forum last week that $5/kg for the 2016-2017 season was "looking on the high side."

"We have that expectation but there's more downside risk than upside risk."

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Wilson said commentator talk of a 'structural shift' in global dairy markets sounded like "glib" jargon.

"I don't know what that means. In America there's no structural shift. It has produced more milk every year for 50 years and will continue to do so. In the European Union we have a bit of a shift, but what's happening (here) is that milk prices are still pretty good but production is concentrated in favourable areas like the west side of England, north west France, northern Germany, the north west of Spain, all of Holland, Ireland and Denmark.

"But elsewhere (in Europe) production is declining. It's a long term trend."

Wilson said European production increases were now moderating.

"There's no structural change. It has ups and downs. It's down at the moment, driven by the major demand side effect in China and Russia and a bit more production. Most people agree that the milk price will be depressed for at least a year or two and then it will be back to a bit more of a supply and demand balance.

"Farmers have got to be realistic. You occasionally get a good year like 2013, but to assume it's going to be like that every year you must be mad, and have no sense of history. But somehow farmers always think prices will remain high."

Wilson said despite the shock to the market of a 30 per cent drop in annual Chinese demand, that market would be strong again.

"China can't really produce all the milk they need because their costs are too high and they're short of water.

"In 2013 everyone now agrees there was a lot of speculation and China didn't need all the stuff they were importing and (demand) has calmed down. But the Chinese market is going to be very strong for a long time."

Wilson said Irish farmers, who had long prepared for the lifting of EU quotas, had since lifted production by 30-40 per cent. 

"They're moaning about the (milk) price. They say 'it can't be us (contributing to oversupply) because we're only a small producer' - just like New Zealand says."

But with just 7 per cent of global milk production traded on the market changes in demand or production can have a sharp effect on market prices.

"In New Zealand you go on rapidly increasing production for nearly 20 years while Australia has hardly increased. So to an extent New Zealand is to blame. It has assumed the market is endless and because you're only small you can go on producing more and more."

Wilson said farmers always blamed their co-operative when things got rough.

"But a farmer doesn't increase production because Fonterra tells them too, surely? These are businessmen. They're not peasants being told what to do by their co-operative. They can read the newspapers.

"I've given up being a forecaster and I know as much as anyone about it. If you're a farmer, you've got to make your own decisions and stand by them on your own."

 - Stuff

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