NFU Chief Dairy Adviser Rob Newbery provides some dairy market analysis, including thoughts longer term growth, volatility and supply management.
The graph above shows how this auction has behaved over the past 6 years and the effect that increasing demand globally has had on increased volatility and a rising average price trend.
The biggest factor to impact dairy prices in the Europe and the world in the past ten years has been the rise in global dairy commodity prices to a point where intervention, no longer smoothes the EU market. We call this price phenomenon ‘price convergence’.
The following graph shows how rising global dairy prices has increased EU dairy prices, but importantly exposed the European market to greater volatility:
With the move of Arla into the UK market, paying a European price, the UK is converged with the European and the world dairy market. This price convergence phenomenon is the reason why UK farm gate milk prices reached 34-35ppl earlier this year, is the reason they are now down to 25ppl for some and will be the reason they next go above 35ppl, when the global commodity market next peaks in price.
In 2012, the UK dairy industry and UK dairy farmers were posed with very different market dynamics to today. At that time, UK dairy farmers had the lowest milk prices in Europe.
When commodities went up, UK farm gate prices were slow to respond and when they went down, farm prices dropped like a stone. In this environment, where the UK market was apparently managed as a microclimate within Europe, farmers naturally asked the question – if we’re not getting the full returns of the market, then we at least need to get a stable cost of production covering price.
Today, the conditions are very different. At the peak of the market in the Spring, UK prices were higher than average in Europe and now in the trough, they remain higher than most European contemporary prices – this is why the NFU believe that current market conditions are very tough – but not dysfunctional.
Questions UK farmers can ask themselves, when trading in this environment are:
- Is my business globally competitive, to allow me to compete with a farmer in Germany, France, Ireland, the USA etc?
- If not, how can I get it to be competitive and what factors are impacting on my competitiveness?
- Do I want to be exposed to market volatility i.e. taking the highs and the lows, or would I rather take a more stable, but potentially lower price? And therefore…
- Am I on the best milk supply contract to suit my business?
Looking to the longer term, the prospects remain favourable. Demand growth globally is still predicted to be around 2% per annum over the next 10 years. Costs of production, scale, efficiency and skill in the UK industry, mean that UK producers on average are still in a favourable competitive position, relative to others in Europe and the world.
However more importantly, from the feedback we get from members, there is a much better appreciation, that the competition is not sitting still – UK farmers realise that to hold our ground, let alone grow our share of the market domestically and overseas, farmers in the UK will need to continually improve efficiency and quality of output, to stay ahead of the competition.
In our recent dialogue with other European milk producers, one hot topic is milk quotas for this the final year of restrictions. For countries facing a super levy for the 2015 milk year, a milk price of 40€c/l meant that super levies were an inconvenience but not a barrier to expansion. With prices nearer 30€c/l we will probably see producers in Ireland, Germany, the Netherlands etc cutting back production quickly. Whether or not they cut back by enough, this is a distinct price advantage for UK producers.
This finally brings me on to other forms of market management. Market management can only ever work in an environment where all players are working to the same rule book and where the market is in some way insulated. You’ve seen from my earlier graph that the European and UK market are now entirely exposed to world prices. To suggest that by restricting production here in the UK or even all of Europe, we could manage global commodity prices is very naive.
It would merely inhibit the ability of UK producers to compete in this growing global market, would penalise the most dynamic business and would leave our domestic market wide open to further penetration by importers of yogurts, cheese and other dairy products in the future.
Supply management has to be a decision for each individual farmer or dairy company. Post quotas, farmers in the UK need to be given the freedom and flexibility to compete to grow their business, unencumbered by policy tools, designed for a bygone age.