Milk ‘is the new oil’ – boding ill for prices

(Agrimoney) – Milk is the new oil – and that does not bode well for prices, said Stan McCarthy, chief executive of food and ingredients heavyweight Kerry Group, whose native Ireland is seen as a leading actor in the dairy market downturn.

While many observers, such as Rabobank and National Australia Bank, have forecast the potential for dairy prices to stage a long-awaited recovery late this year, Mr McCarthy said that even this outlook looked optimistic.

“Quite frankly, I’m surprised that anybody is talking about a pick-up in dairy [prices] in 2016,” he said.

“I am bearish on dairy.”

‘Extremely high production’

Mr McCarthy – head of a company which started off in 1972 as a milk processor whose investors included eight farmer co-operatives – acknowledged that dairy was, like other commodity markets, “cyclical” implying that it will ultimately “turn around”.

“But you must recognise that this decline started in the middle of 2014 and has continued,” he told investors.

“You now have an environment of extremely high production around the world,” on top of substantial inventories. “So it’s going to take a long time for that situation to right itself.”

In separate comments to Irish broadcaster RTE, cautioning of “serious headwinds” for the dairy industry this year, he compared the sector with oil – in that both have been marked by growing output even as prices fall.

Irish surge

Milk production rises have in factor been particularly notable in the European Union, following the removal of quotas at the end of March last year, and led by Ireland, whose relatively wet and warm climate is ideal for grass growth and pasture-based dairy output.

Indeed, Irish production in November, at 346.7m litres, up 46% year on year, albeit in a relatively weak period of the output cycle.

For the April-to-November period, Irish milk output was 15.8% higher at 5.46bn litres, according to European Commission data.

Kerry Group has expanded from its dairy commodity roots to higher value ingredients and foods, through both organic growth and acquisitions, which reached E900m last year, and which Mr McCarthy signalled would continue, with the company having an active pipeline of potential acquisitions.

“We have a strong cash flow and a very strong balance sheet and we’re a growth organisation. So we will continue to pursue acquisitions over the course of 2016 and beyond.”