The underlying sentiment at a major dairy conference in London this week was not positive.
Working under the banner of managing volatility, or to give it its full title ‘The New Market Crisis – Managing The Extremes of Dairy Market Volatility’ a range of speakers from around the world gave their perspectives on the subject.
The conference is in its 19th year and is organised by Barry Wilson, editor of the British-based Dairy Industry Newsletter.
According to speakers brave enough to crystal ball gaze, the immediate future they painted for the dairy industry is not pretty. And while the longer-term future is slightly prettier, some farmers and processors they predicted won’t survive to be part of it.
Dairy Perfect Storm
While the causes around ‘prefect storm’ in dairying at the moment are not widely disputed – the slow down in Chinese demand, the Russian ban on EU foods, an oversupply of milk worldwide spearheaded by the increased production from a quota-free Europe – thoughts on the factors that need to change for the future to be more positive were less homogeneous.
According to Pieter Giortz-Carlsen, Head of Europe for Arla Foods, the reduced demand from both Russia and China, he said, were key in the downturn.
Demand from 2008 to 2014 from the two countries was at 28% of the world demand and it dropped to 10% in 2015. (Chinese imports were down 50% and Russian imports were down 42% in 2015.)
He was clear in his outlook for the rest of the year. “We don’t believe the milk price will improve in the second half of 2016. There is still a lot of milk around in Europe that we need to handle.”
However, the bottom line, he said, is the significant uplift of the middle class in the world and this is the opportunity for the dairy sector. “The demand is there and it will come back.”
David Dobbin, the outgoing Chief Executive of Dale Farm, the consumer brand arm of United Dairy Farmers Group, a UK dairy farmer co-operative owned by over 1,900 dairy farmers, was less optimistic.
He told the conference that the biggest challenge for farmers and processors alike in such a downturn is surviving it.
He too reiterated that the long-term prospects for the dairy industry are good, but said those who failed to prepare for the current volatility are now paying the prices.
Dale Farm, he said, identified that the turbulence coming in powders and moved from a company that was heavily dependent on powder to one that is now virtually all cheese with very little powder in its product offering.
The current returns, he said, are the lowest real returns in 20 years. He also said that unless there is a dramatic reduction in output the downturn continue right into 2017 and “perhaps slightly beyond”.
However, he said supply is the irregular in the equation and that demand is relatively constant. “Supply is causing the volatility….the market must find some new manner to regulate supply.”
The removal of EU market management measures; faster transaction speed and transmission of information; increasing trade liberalization which had led to global flows of product and money; and volatility around oil are all key factors, he said in the background.
While price is usually the main arbiter of output, the opposite has happened in Europe, he said, and output has gone up as prices have gone done.
What this means though, he said, is that we are now experiencing a hard landing and a number of people will not survive.
Who will survive?
The people who will survive are those with deepest pockets, the least ambition, or most government support, he predicted.
High cost operations or farmers with high debt will be driven out, he warned., and the number of farmers exiting the industry will speed up, not slow down.
On a positive note (for Ireland), dairy production, he said, will continue to move north west in Europe, thanks to the greater volumes of rain and grass, providing lower cost production bases.
At industry level, he was highly complimentary of the National Dairy Council and the work it does to promote the consumption of dairy within Ireland, which he said drove out British dairy products of Ireland. The British dairy industry needs to do likewise, he said, and stop being a net importer of dairy produce and drive out international (including Irish) dairy produce.
He also warned that the dairy industry is facing into dealing with a generation that does not have cereal with milk for breakfast.
“And if we don’t do something about this the demand will drop, not go up.”
Former Secretary of the Dutch National Committee of the International Dairy Federation Adriaan Krijger was less optimistic for the immediate future of milk prices.
“Maybe it will take longer than 2018 before a real balance in the market is realised,” he said.
He also criticised dairy farmers for not reacting ‘adequately’ to the cut in prices.
“The farmer tries to practice damage limitation and for most family farms it’s obvious to continue producing as long as variable costs do not go above the price.
“But, the main reason for oversupply is that dairy farmers do no respond adequately to the market.”
A global mechanism, he said, is needed to control supply that gives a return to farmers and provides consumers with a reasonably priced product.
Kiwi and Fonterra’s Trade Strategy expert Francis Reid questioned from the floor the impact EU subsidies have had on the crisis. “The milk price signal is severely blunted by EU subsidies," he said.