European farmers dial back on milk production, says ASB
The ASB has described European dairy production as a "milk mirage", and predicted global prices should rise later this year.
ASB rural economist Nathan Penny said he was continuing to pick a $6 per kilogram of milksolids payout for the 2016-17 season, partially based on production figures coming out of Europe.
Last week Westland Milk Products chief executive Rod Quin said that after a visit to Europe, he forecast prices would remain low for at least two years, and announced a payout prediction of $3.90-4.00 for this season.
He based that forecast on the global oversupply of milk, compounded by the aggressive approach of the European dairy market.
Penny said it was true that production had increased over the past year, after EU quotas were lifted.
"That wasn't surprising, but if you are looking at annual change numbers they become meaningless because you are comparing a high number now to one that was being held back artificially.
"To get around that we've focused on the post-quota period. That shows a surge but it's really started to slow, then month to month it's really flat and even trending negative," Penny said.
Prices in Europe were very low and below break-even for farmers, so in this new environment they were doing what was expected and slowing growth.
Penny said when support for EU farmers was recently announced, New Zealand commentators were pessimistic because the moves would continue the price slump.
"What I said at the time was 'what is the rationale for the EU supporting farmers' - the rationale is because farmers are under the pump," he said.
Most dairy market buyers were unaware of this "data disconnect", and would be caught short of supply later this year, lifting prices.
"These data support our long-held view that the dairy cycle will turn this year. In particular, with New Zealand and EU production growth likely to further weaken this year and Chinese demand improving, the necessary conditions for the recovery in global dairy prices are gradually falling into place," Penny said.
Quin said he did not disagree that there might be a whole milk powder price rise in the next six months "but that will not deliver a payout with a 6 in front of it".
He stood by his view that it would take at least two seasons for better returns.
"What we haven't seen is milk production being turned off in Europe - in France they have put in a voluntary management of milk mechanism but they could easily dial up more milk if they chose to," Quin said.
He also repeated his observation that European farmers benefited from lower interest rates and that New Zealand farmers were under greater pressure to lift environmental standards.
"Environmental standards didn't measure up to what we would consider adequate in New Zealand," he said.
While some farmers had invested in environmental protection, he was surprised by some of what he saw, both on farms and in processing.