Unfortunately no good news for dairy farmers concerning the milk prices: the milk prices are still decreasing. For instance the biggest dairy processor in the Netherlands, FrieslandCampina, has lowered the price for May 2016 with nearly 10%: from 27.5 euro/100 kg milk to 25 euro/100 kg milk. Most of the expected developments that keep pressure on the milk prices, are the same as in the previous months:
- Stocks remain relatively large on both the supply and the demand side. Buyers increase their stocks to use them if prices go up: however they carry out this increase at such a moderate pace that prices currently don’t raise. Because of low demand suppliers also have to increase their stocks, moreover because suppliers don’t decrease their production;
- Chinese imports are still low. Low oil prices luckily did nearly not decrease demand from the Middle East;
- Russia has prolonged the ban on imports from the EU, the USA and some other countries for another year. But even without ban, the weakened purchasing power (because of the weak rouble) will keep Russian imports at lower levels than in the past. Some small shift can take place because of less export from Turkey to Russia;
- The European Union faced a sharp fall in milk production at the end of 2014 and Q1 of 2015 because EU-dairy farmers shrank production to avoid penalties that could arise from exceeding their milk quota. Given the currently higher numbers of animals and the abolition of the milk quota, such a sharp fall in milk production in the EU will not take place in the coming months. Currently EU-production is about 5% higher than one year ago.
However, there are also factors that could raise milk prices (but not in the short run):
- More producers in the Southern Hemisphere, especially in New Zealand, go back to their basics: mainly or only pasture based milk production and less use of concentrates and other additional feed. Wider (re-)application of the pure pasture based system decreases milk production;
- Production in Australia and New Zealand together is about equal to last year so no production increase from Oceania;
- A smaller growth in US-milk production is expected because of, on average, low margins. Consumer demand in the US for dairy products is increasing. Imports by the US, especially cheese and butter, are somewhat increasing and US-exports are declining.
All together the milk prices for dairy farmers will be around the current level and a increase is not really expected in 2016. Maybe an upward trend comes at the end of 2016 but that will be very moderate because of huge stocks. ERS, part of the US Department of Agriculture, forecasts a small decrease in milk prices for Q2 of 2016 and a small increase in Q3 and Q4 of 2016.
The EU-intervention partly prevents a further price decrease but, at the same time, postpones a price recovery. Fortunately the signals on the cost side are generally still positive. In the US, corn, soy and alfalfa prices remain stable. Good harvests for soybeans are predicted for 2015/2016 and also for 2016/2017. Feed prices will be attractive compared to recent years and also energy prices are at a favourable level given low crude oil prices. In many countries interest rates are still low and wages don’t increase much.
However for some dairy farmers the current period of low margins will be too long so they will have to leave the dairy business. The production gap they leave behind will not cause a price increase because this gap will be filled up very fast, especially by dairy farmers from Europe with a relatively high share of their costs in fixed costs (land, buildings, equipment). Dairy farmers in Eastern Europe produce less than last year but this is more than compensated by their colleagues from Western Europe. So the key to higher milk prices worldwide tends to be a decrease in milk production in Western Europe.