At the Balmoral Show next week there are a few topics guaranteed to be talked about when people meet.
Top of the list is likely to be what happened to the good weather of April, followed by how well or otherwise people fared with their single application form and whether anyone actually understands greening. After that another certainty is when will milk prices finally improve – and while forecasts are always difficult for any commodity the conclusions on dairy market trends are unlikely to bring any joy to hard pressed farmers.
The contrast in the dairy sector over 12 months could not be greater. At Balmoral Show last year milk prices were just coming off their peak; farmers were still in a buoyant mood, with bold investment plans that in some cases even involved buying land. The months since then have been bruising for all dairy farmers, and based on the comments of the European Commission’s Milk Market Observatory (MMO) – set up to monitor milk prices and trends – the outlook is far from encouraging. No matter how brave a face farmers may put on for Balmoral next week, that will weight heavily because many farmers are now deeply concerned about their financial position.
Hopes of recovery rose in December, with a surge in prices at the New Zealand auction. Run by Fonterra and known as the Global Dairy Trade (GDT) auction this is effectively the barometer of world prices for dairy commodities. This week the price at the GDT dipped again, this time by 3.5 per cent. That means all the gains of December and more have now been lost. It may be a gloomy conclusion, but this suggests there may be no real recovery in dairy prices, even in the autumn, and that ties with the conclusions of the MMO.
One of the big reasons for prices staying in the doldrums is that buyers, not least in China, are convinced European production will rise now that quotas have gone. They believe that in that situation they will be able to continue buying as and when they need product, without the cost of holding stocks. The MMO is made up of industry experts from across the EU. Criticism in the past has been that it is too good at reporting what has happened to prices, and not sufficiently good at looking at where they are going. A meeting at the end of April was to assess the response to the end of milk quotas. Not surprisingly it confirmed the dip in prices, after a brief recovery, but made no forecast as to when these might improve. It said lower energy and grain costs had helped farm margins, but made no reference to the problems of fertiliser prices remaining high, despite lower global oil and gas prices.
Buyers are convinced milk production will rise in the EU now that quotas have gone. They are probably over-reading the outcome, basing their view on countries like Germany and Ireland, where production will increase dramatically, as opposed to the actual EU average. This is, according to the MMO, 1.5 per cent, which would have been higher if milk prices had been better to justify expansion. The increase in the US is 1.9 per cent and a similar figure is forecast for Australia, while drought will take New Zealand production down by two per cent. This is modest, although what the industry really needed was a reduction from high production that flowed from good prices in 2013.
As to commodities cheese production has responded well to weaker markets, but stocks of milk powder remain a problem and a drag on European and global markets. The average milk price in the EU is around 32 cents according to the MMO, which is well out of the intervention zone – but translated into sterling that is still depressingly close to the 20 pence a litre mark. As to the future the MMO has identified well where the problems lie. Any increase in European production is unwelcome, and the Russian import ban is continuing to cause problems. It is also warning of Russian plans to increase domestic milk production and of the relationships it is building with new suppliers. Both could be long term threats, but for now what farmers want is an answer to a simple question – when will better days finally arrive for global dairy markets, and that information is not coming from the MMO.