Bright future for milk prices

Global milk supply is getting tighter. Demand for dairy is continuing to grow. The power is shifting from the supermarkets to the milk processor.

The milk processor is lifting milk price, but farmers are hindered from producing more by higher costs and stricter environmental regulations limiting supply.

This paragraph very nicely summarises the market situation facing dairy co-ops, dairy farmers and retailers.

In one way, nothing has changed.

Supply and demand decide the price. However, in another, a lot has changed.

Dairy farmers the world over are now not able to respond to the signals of higher milk price by producing more milk. In fact, across the world they are being forced to reduce milk production.

What exactly this means for the market was discussed at length in London last week.

GIRA is a well-known consultancy and analysis company with a global footprint and its CEO, Christophe Lafougere, spoke in London.

He very clearly explained the supply and demand situation, showing why commodity dairy prices are high at the moment.

He said: “The demand has continued. We can see Chinese demand (2020/21) has increased across all dairy products (whole milk powder +33%, cheese +36%), except infant formula (-20%). The consequence is, we have higher dairy commodity prices.”

Looking to the future, Lafougere predicts we are going to see demand increasing and that over a five-year period (2021 to 2026), global consumption is going to increase by another 30m tonnes.

Almost 60% of that additional demand will come from China, North America and Latin America.

So, the big question is, how will this play out at farmer, processor and supermarket level?

Lafougere suggested that already, across Europe, processors are getting nervous about their supply from farmers. Some processors in Germany that were exporting are pulling back on the “export” business and focusing on the local, higher-value business.

Some French farmers are exiting dairy and going back to cereals as the grain prices mean they can do that better and easier.

Power shift

Lafougere also said the power had shifted from the supermarkets to the processors and some retailers have lost contracts on liquid milk because the processor needs more money and the supermarkets were not willing to pay for it and, hence, lost out.

He said the supermarkets were reluctant to pass on all the price increase to the customer.

Lafougere said: “To fill the gaps in demand globally there was going to be more dairy product traded, but the fact there is going to be less product for traders means it is going to be an exciting new world where milk has more value.”

Fonterra set to add value at home

Fonterra’s Thijs Bosch spoke about what is happening in New Zealand. New Zealand milk supply is expected to decline and be flat at best – milk collection is down by 4% in the season to date (2021/2022).

Bosch outlined that the key challenge Fonterra needs to meet is to get more value with less milk.

In the long term, Fonterra plans to lead three strategic choices – focus on New Zealand milk, be a global leader in sustainability and be a leader in innovation and science.

The plan is to divest the Chile business and review Fonterra Australia ownership. The capital from these changes will be used to differentiate New Zealand milk, grow food service and further strengthen the Fonterra consumer business.

Water the worry for the US

Californian water reservoirs and North American drought monitor stations continue to show that some parts of the US are going to be severely lacking in water with consequences for many farmers in terms of growing crops and feed for cows.

Peter Hardin, publisher of US publication The Milkweed, also made the point that very high prices for products in US supermarkets were going to have an impact on sales volumes. Hardin highlighted the $6.99/lb for Land O’Lakes butter and questioned if this was sustainable.

Still no money in UK liquid milk

Ash Amirahmadi is the managing director of Arla UK and he said there needs to be a step change in the profitability of the UK liquid milk sector, which is 50% of the UK dairy business.

He said inflation is the number one issue on the minds of British consumers and the cost of living crisis was difficult to navigate, but there was no easy way around that for everyone. Ash suggested that, as an industry, the message had to be positive to keep dairy farmers in the game.

He said: “Farmers need to be proud as demand is growing, the industry is resilient, the industry is innovative, has leadership and supports government.”

EU speaker highlights livestock benefits

Brigitte Misonne, head of agri at G3 Animal Products, said that more needed to be done on explaining the positive message on livestock at a macro level.

She said: “Animals convert non-edible biomass into highly nutritious food for humans. At world level, only 14% of dry matter ingested by livestock is edible to humans (86% is grass and crop residues).

“Livestock farming produces food on 57% of land that cannot be used for crops (marginal land).

“Livestock farming ensures rural vitality and economic activity in regions where it is the only sustainable economic activity and crop farming is not possible due to soil conditions.”

Most colourful contribution from the audience

Speaking from the floor, Alan Wilkinson, head of food and agri at HSBC London, said: “I don’t see plant-based products coming to take over the market. Mostly, they taste rotten, their sustainability credentials are poor, most of these businesses won’t make the end of the decade. A lot of the plant-based business models, you wouldn’t blow your nose with them, and some of the businesses and products coming over the hill are pathetic.”

Netherlands dairy to be scaled back

Erik Elgersma, formerly of Friesland Campina and now a dairy industry consultant, spoke about the changing demand and supply dynamic.

He said: “The Netherlands is in the process of constraining its milk pool. When the Dutch government says there is a limit, there will be a limit.

“The Netherlands milk pool by 2030 could well be 26% smaller than in 2020, and whether Dutch dairy production will decline by less than 20% or by more than 20% depends on a number of factors such as what happens on pig farms, success of methane reducing inhibitors, farmer demographics, etc.”

Low debt and businesses performing well

Eoin Lowry, head of agri with Bank of Ireland, spoke about the performance and debt levels on farms.

He said: “The Irish dairy industry has grown 5% to 6% per year, but remember the total milk pool is still relatively small, and is about 25% the size of the German milk pool.

“However, we have to say the Irish dairy industry has outperformed when we look at key metrics around growth in operating margins and the health of the balance sheets of the dairy industry.

“The Irish farming sector remains lowly borrowed and only one-third of farmers actually have debt.”

If you were to sit back and listen to the speakers from across the world and summarise the messages, it is fair to say that at any period over the last 20 years, there has hardly been a more positive picture painted on milk prices or dairy demand required.

What exactly this means for Irish or UK dairy farmer margins is not yet set and will depend on a number of issues.

For dairy businesses, it is fair to say it looks like the internal growth period (ie growing own milk pools) looks to be coming to an end across the world and this will bring business challenges.

Turnover via more volume won’t be happening so more will be forced into the discussion on increasing the value of the product.

The retailer or supermarket power looks to be waning as supplies tighten up so the expected push back not to increase shop shelf milk prices looks to be under pressure.