Strong production, tested demand send milk prices crashing
Strong global milk production and rebalancing of demand among key buyers has delivered one of the biggest drops in whole milk powder prices in recent years.
According to Agribusiness and Food Marketing programme director, Nic Lees, the low prices are the best thing that can happen, as it will limit the European expansion.
A cost war is going on between New Zealand and Europe at the moment, says Lees.
“Quotas have come off production in Europe so they are expanding production. This is similar to what is happening in oil with expanding production due to shale gas,” Lees says.
“Ireland, for example, is planning to increase milk production by 50 per cent.”
He says New Zealand is the Saudi Arabia of milk — “We can be the lowest cost producer, but need to focus on grass based production to weather the storm”.
“Grass will always be the lowest cost source of feed and New Zealand has the most efficient grass-based dairy system in the world.
“Ireland can grow grass too but currently they utilise less than half what they grow. The large housed dairy operations in Europe are also only profitable at high milk prices,’’ Lees says.
“We need to focus on what we are good at, which is grass.”
However, Lees admits that the halcyon days may be gone for a while and we are unlikely to see high prices again soon.
“It is going to be a slow recovery of price and dairy farmers need to be able to be profitable at $5/kgMS or they won’t survive.”
Lees says the average milk price over the last 10 years was around $5.50/kg MS.
“It is likely that this will be similar over the next decade as well. What we are seeing though is greater volatility. This is going to continue so farmers need to have systems that are still profitable when the price is low. The most resilient system is the low input grass based system.”
As an economy we also need to see the opportunities in other areas, he adds.
“For example there have been record high returns for beef in the first six months of this season, with the average per tonne value up 28%. Beef is a great story with China needing to increase its beef imports by up to 20% a year for the next five years to meet its surging demand for protein.”
Lamb also has good prospects, Lees says, and there are other opportunities, such as can be seen with the growing sheep dairy industry.
