October 7, 2010

Global dairy volatility to worsen in five years

Dairy farmers across the world face increased price volatility within the next five years as global milk production gears up to expand by a predicted 120 million tonnes to 800 million tonnes over the next decade.

Their main challenge will be managing the risk to their businesses, according to New Zealand milk giant Fonterra.

Paul Campbell, the firm's strategy manager, said farmers would have to look carefully at their balance sheets, work out how much debt and equity they had and how they could hedge fluctuating prices.

Forecasts of production growth had been accurate in the past, he said, and there were big implications for farmers and land prices everywhere if India, China, the US, Pakistan and New Zealand expanded milk production as predicted.

"It means that milk prices in all countries are likely to converge and the price in the UK and New Zealand, for example, may well be set by a marginal producer in Argentina or a marginal consumer in China.

"It will be very hard to escape the economics of this as these markets grow," he said.

To manage risk, farmers would adopt different technologies to increase their margins, such as increasing scale, introducing better feeding regimes or improving genetic selection, Campbell said, adding that although in New Zealand the introduction of GM technology would be "a step too far".

Future opportunities for dairy farmers include the development of nutrition products. Fonterra, which spends EUR50 million (US$69 million) a year on research and development, has several in the pipeline, while food security and reducing wastage were other big issues.

"Some 20%-30% of milk solids produced on farms never makes it to the consumer. That provides us with opportunities because we need to feed more people globally and an important part of that will be reducing wastage," he added.