Just over a month ago in the third week of June, the average product price at the Global Dairy Trade (GDT) auction fell by just 1.3% and there were hopes within the dairy market that the slump in prices was beginning to bottom out.

However, market sentiment is extremely pessimistic right now in the wake of the last two GDT auctions, which saw the average product price fall by 5.9% in the first week of July and a further 10.7% this week gone by.

The GDT has now fallen for nine consecutive auctions since mid-March and it leaves the southern hemisphere index at its lowest level in 10 years.

Supply glut

One of the main reasons held up for the decline in dairy markets is a softening in global demand that has created a supply glut that has yet to be worked through.

China is the world’s largest importer of dairy products but the country’s demand for dairy imports has dropped off due to a slowdown in the Chinese economy and a build-up of excess supplies from previous years.

New Zealand had built up a significant dependence on the Chinese market with almost 40% of dairy shipments destined there. However, New Zealand dairy exports to China have collapsed by more than two thirds since the start of 2015 compared with the previous year, forcing exporters to seek alternative markets for product in a year when milk production has not fallen off.

Added to this, the Russian market, which has traditionally been a major destination for butter and cheese, has been closed to imports from the US and Europe for almost a year now.

Industry response

In response to the difficult market situation many dairy processors have been looking closely at their businesses to see what savings can be made.

Earlier this week, the New Zealand dairy giant Fonterra announced plans to cut 523 jobs from its 16,000 strong workforce.

Fonterra said the job cuts would generate payroll savings of up to €36m per annum and the company would continue to make changes within its business in order to remain competitive.

However, Fonterra is not the first to announce job losses this year in a bid to reduce costs.

In April, the Finnish processor Valio said it would be cutting more than 320 roles from its workforce before the Dutch dairy giant, FrieslandCampina, confirmed in early June that it expects to shed up to 375 jobs over the next three years.

Both Valio and Friesland are two processors with major exposure to the Russian market and its closure in September last year has undoubtedly had a significant on their respective businesses.

Almost half of Valio’s exports were sold into Russia while Friesland estimates its profits in 2014 took a hit to the tune of €80m as a result of the trade embargo.

Dairy processors are not the only ones to have begun a review of their cost base as we saw last week when the British retailer Tesco said it was reviewing how it sources its milk supply.

Tesco wrote to 650 dairy farmers who supply milk directly to the retailer through the Tesco Sustainable Dairy Group (TSDG) to say it would be reviewing its milk supply scheme. Sourcing milk from the TSDG is very expensive for Tesco as it pays a much higher milk price than the UK average which is linked to the average cost of production.

Market Recovery

Market analysts have said that they expect an improvement in the global dairy market in the latter half of 2015 or early 2016. However, after Russia extended its trade embargo until 2016 and last week’s rout of the Chinese stock market, dairy farmers in the EU and New Zealand will be sceptical of any imminent market recovery.

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