January 19, 2016


Milk surplus destablised dairy industry in 2015



Milk surplus characterised the global dairy industry in 2015, and Rabobank expects the brakes to be applied to milk production in the exporting countries in the first half of this year.


As of the fourth quarter, according the last quarterly report of Rabobank in 2015, the world produced more milk than the market needed.


In UK alone, according to the AHDB Dairy, a division of the Agriculture and Horticulture Development Board, milk deliveries in 2015 totalled around 1.4 billion litres higher than in 2013, which was more than enough extra milk to fill a plant the size of Arla's Aylesbury site to its annual capacity.


And yet, production, is showing little sign of slowing, despite the slump in farmgate prices keeping significant pressure on margins, AHDB Dairy added.


Although demand improved in the US and the EU, there was weakness in many emerging markets. Aggregate demand appeared to be expanding, according to Rabobank, "but not enough to deal with recent supply volumes at anything more than bargain prices".


In July last year, Bloomberg reported that the US was producing so much milk that some found its way into dirt pits for lack of buyers.


Excess milk dumped


Agri-Mark, a 1,200-dairy cooperative in New England, USA, dumped 12 truckloads, or 272 metric tonnes, of skim milk in June 2015 for the first time in five decades, Bloomberg reported, adding that Northeast dairies dumped 31% more in the five months through May 2015 than in the same period in 2014, citing government data.


Milk production in the main producing regions (EU, New Zealand, Australia, US and Argentina) has grown by around 2% annually over the past five years, which is around 5 billion litres more milk per year.


AHDB Dairy said that up to early 2014, the demand for dairy products in countries such as China and Russia was able to absorb most of the increased output, supporting prices but that "[t]he disappearance of the Russian market in the summer of 2014, combined with the stock build-up in China reducing its import needs, meant demand was suddenly too low for the rate of growth in milk production".


It said imports by China and Russia in the 10 months through October 2015 fell by around 50% from the same period in 2014 to just under 400,000 tonnes of product, or the equivalent of more than 3.5 billion litres of milk.


"This imbalance in the market saw average global prices for dairy products, based on Fonterra auction results, drop by 6% through 2015. Milk supplies, however, continued to increase, fuelled primarily by growth in the EU resulting from the removal of quotas in April 2015", it said.


With a large chunk of import demand taken away by China and Russia, the excess milk has ended up as accumulated stocks. EU stocks of skim milk and cheese are reported to be at their highest levels in at least five years while US commercial stocks of milk powders hit a record high in the summer of 2015.


Prices lowest in 5 years


The US Dairy Export Council said milk powder inventories as of December 2015 reached around 400,000 tonnes, or just under 20% of annual imports of milk powders.


Overproduction of milk also drove its prices to its lowest in five years last year. As a result of reduced prices of skim milk and whole milk, the Dairy Price Index in December 2015 fell similar to the levels seen in the first half of 2009, according to the UN Food and Agriculture Organisation.


To cope with the excess milk being produced, some producers have resorted to incentives to reduce production. Dutch co-operative FrieslandCampina, for one, has offered its member suppliers around 1.5 pence per litre (€2/100kgs) extra for deliveries between Jan. 1 and Feb. 11 provided they are less than or equal to the volumes produced between Dec. 13 and 27.


AHDB Dairy said a recovery in prices to more sustainable levels for the whole supply chain depends on a combination of three key events: a reduction in milk production, the sale of excess stocks and a rise in demand.


While some areas are starting to slow down production, the US and the EU are expected to see growths in 2016, although the latter is seen to grow at a slower rate, while New Zealand is expected to produce 3%-6% less milk depending on the impact of the El Niño weather phenomenon on grazing conditions.


NZ production vital in recovery


Fonterra, the world's leading milk processor and dairy exporter, forecasts a year-on-year reduction of milk volumes in New Zealand by at least 6%, or 1.300 billion litres of milk this season as farmers responded to the low milk price environment and dry conditions affected parts of New Zealand.


Since August 2015, Fonterra has reduced the amount of whole milk powder it expects to offer on the GlobalDairyTrade (GDT) platform over the next 12 months by 146,000 metric tonnes.


According to the AHDB Dairy, the decline in NZ milk production is a vital element in the recovery of global dairy markets, especially since the country exports around 95% of its milk.


While demand for dairy products is expected to continue to grow at a global level, especially in developing countries, the stock levels will have to return to more normal levels before the world can see a sustainable recovery in prices, the AHDB Dairy said.


Rabobank sees excess inventories gradually eroded in the first half of 2016, with stocks nearly normal by midyear, as lower pricing and some improvement in income growth foster improved buying in deficit regions. --Rick Alberto

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