Thursday 16 June 2016

Demand in milk and prices

Arla Foods have announced yet another milk price reduction with their UK standard price per litre dropping by a penny to 19.12 pence. This is well below the cost of production for almost all farmers and does not bode well for the coming months.

The market continues to be impacted by the global imbalance between milk supply and demand.  Commodity stocks are high and the market is extremely competitive which is continuing to generate further downward pressure on prices.

Arla Foods Farmer Board director Johnnie Russell said: “Recent data suggests that the global growth in milk production is levelling off, which may lead to volumes stabilising later in the year.  However, it is too early to predict whether this trend will continue over the coming months.”

This potential change in sentiment is reflected in the New Zealand co-op Fonterra’s forecast for the coming year where it raised its predicted price to 14.6p/litre.  But this remains a pitifully low price. Only two years ago Fonterra was paying farmers 29p/litre.

Fonterra’s very modest optimism is not based on an increase in demand for milk but rather on the expectation that farmers will start cutting production across the world due to the poor returns.

This optimism was reflected in the Global Dairy Trade auction which saw prices rise by 2.6 per cent - the third increase in four sales.  But despite this, prices remain stubbornly low with no consistent pattern of sustained price rises.

Having said that, the Dutch dairy board has also raised its official prices for butter, milk powder and cheese for the first time in over a year which lends support to Fonterra’s cautious optimism.

However with EU milk production 7.2 per cent higher on the year in the first quarter of 2016 and world production also up 3.9 per cent over the equivalent period it is clear that something dramatic is needed to rebalance supply and demand.

The hope is that the rate of increase in production will moderate if not fall and this is reflected in the EU’s milk market observatory board’s prediction that EU production is expected to rise by only 1.4 per cent over the whole year.

But it does not take a genius to work out that if demand does not also pick up by at least that amount, there is limited hope of a serious increase in milk price for at least the rest of 2016.




James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells

T: 01749 683381
E: james.stephen@carterjonas.co.uk

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