When will we see a global recovery in milk prices?

A cow grazing
A cow grazing

According to DARD Statistics, with the exception of one or two temporary miniscule rises, Northern Ireland has seen two years of falling farmgate milk prices. NI milk prices peaked in November 2013 and have been falling ever since.

The last 12 months of DARD data has recorded an average of 20.95ppl , significantly below the cost of production for many local dairy farmers. This has put our industry under severe strain with many producers wondering what does the future hold for their businesses and has many asking when will we see a global recovery in milk prices?

One thing which is for certain is that a global recovery in milk prices will be slow. This is due to a mixture of reasons; still-rising milk production trends, a volatile Chinese economy (and any impact upon demand for imported dairy products), the continuing Russian ban and Macroeconomic pressures in the form of exchange rate volatility and low crude oil prices. In addition, high levels of dairy commodity stock held in store and any subsequent overhang could be a cause for concern and may hold back recovery.

In relation to rising milk production volumes, many in the industry are pinning their hopes on adverse weather phenomena known as El Nino. Whilst it may restrain milk production in Oceania for example, closer to home here in the UK, milk production levels are still heading in the opposite direction.

Across the UK, November 2015 was the 3rd warmest on record, with an average temperature of 8.2⁰C. Consequently, grass continued to grow in parts of the UK and the milk kept flowing, despite stubbornly low and unsustainable farmgate milk prices. Usually a prolonged period of low milk prices leads to reduced milk production.

In Northern Ireland, November 2015 saw a year-on-year increase of 2.1% in milk production (compared to November 2014) and the calendar year looks to beat last year’s record year of 2.2 billion litres.

For us to see a sustained recovery in milk prices, markets will need to return to equilibrium, in other words, demand will need to match supply coupled with a sustained price recovery at levels which generate real margins for traders which in turn allow meaningful returns to be passed back down to our dairy farmers.

With milk quota abolished and milk production still higher than last year, as was stated by one leading industry figure only a couple of weeks ago, there is an urgent need for the industry to refocus its business strategy to look at how our industry can be market rather than production-led, focusing on value (and margin) rather than simply volume.

This is a big ask but this is one issue which must to be addressed in 2016. There is a need to take a realistic view of the year ahead in terms of recovery in prices.

With the latest Global Dairy Trade Auction Event in New Zealand recording a 1.6% drop, markets would appear to be still in the doldrums and there is no optimism of any quick recovery as shown in any of the New Zealand forward contracts.

2016 is going to be a very difficult time for local dairy farmers and there will be further downward pressure on price in the early part of the year as our industry will be approaching peak seasonal milk production.

The Ulster Farmers’ Union will be focusing on support for members in these trying times in the year ahead.

In terms of short term assistance, with the 31 January 2016 deadline for Income Tax Self-Assessment pending, we are calling on professional financial advisers such as accountants to be aware of Averaging, as a way of easing/spreading the financial burden created by the tax return.

As far as the longer term is concerned, our lobby activities will include; working on a fairer and more efficient food supply chain (adding value rather than volume); the development of new export markets; improved public procurement of local food products; consideration of measures to help the dairy industry better manage market volatility; develop the introduction of alternative sources of finance such as the European Investment Bank.