Wednesday, 22 October 2014 09:18

‘Grey’ market lends a silver lining

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THE IMPACT of Russia’s dairy ban on global dairy prices may be waning. The emergence of a ‘grey market’, allowing some Russian allies to buy milk from Europe and re-export it to Russia, is easing downward pressure on prices. 

Fonterra director Ian Farrelly told a Smaller Milk and Supply Herds (SMASH) conference in Cambridge last week that EU milk is starting to trickle again into Russia through a “grey market”.

“The situation remains complex but there is a grey market developing where we find allies of Russia, like Turkey, are getting milk from EU and putting it into Russia,” he told SMASH delegates.

Russia, the world’s second-largest importer of dairy products, banned milk from the US, EU and Australia as a tit-for-tat response to trade sanctions imposed by the west over its conflict with Ukraine.

The ban left 250,000 tonnes of dairy products seeking new buyers on the world market; coupled with a surge in milk production around the world the Russian ban drove down dairy prices.

However, last week’s Global Dairy Trade auction saw the trade weighted index jump 1.4%, its biggest gain this year.

Farrelly later told Rural News that he believes milk will find its way into Russia through “unconventional borders”. “While Russia has banned direct imports from Europe, they are still trading openly with others and we think over time milk will find its way through those countries.”

This should ease the downward pressure on dairy prices, which have fallen nearly 50% since February.

“The extra production that hasn’t got a home is creating (price) sag on the total world market, at a time when here is a lot of milk because of very good seasons,” says Farrelly.

He doesn’t expect New Zealand dairy products to find their way to Russia through the grey market. Russia buys mostly cheese from Europe and New Zealand is dominant is whole milk powder, a product not high on Russia’s list.

University of Waikato professor of agribusiness Jacqueline Rowarth says rumours of the grey market have been circulating, including through China.

She hopes this will help prices bounce back and lift the milk payout to farmers. But she points out that Fonterra has indicated prices must rebound 30% by the end of the year to maintain the $5.30/kgMS forecast payout.

BNZ economist Doug Steel says it’s hard to get any “concrete info” on the existence of a grey market. He believes while the decline in dairy prices is arrested for now, there remains intense downward pressure.

Grain prices relative to milk price remain low in the US, encouraging farmers to produce more milk. The uncertainty in global stock markets has taken volatility a step higher, says Steel.

“So, while we’ve had the year’s biggest increase in the GDT price index, we have to keep an eye on future GDT events; it’s a case-by-case scenario.”

Steel says the low milk price will increase pressure on EU farmers to scale back production but this won’t happen overnight. “While the seeds are getting sown now, we won’t see the results until next year.”

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