Milk prices ‘to stay weak for now’, thanks to EU, US output growth

(Agrimoney) – Weak milk prices will last until the second half of the year, New Zealand processor Westland Milk Products said, blaming growing output in the EU, where dairy groups are “overpaying” farmers, and in the US.

Westland – the second ranked dairy co-operative in New Zealand, the top milk exporting country – cut to NZ$4.15-4.45 per kilogramme of milk solids, from NZ$4.90-5.30 per kilogramme of milk solids, its forecast for its payout to producers in 2015-16.

The reduction, which followed a downgrade earlier this month by rival Open Country Dairy to its price forecast, “reflects Westland’s view of what the market will deliver”, the co-operative said, foreseeing no revival in values for now.

“Lower prices are expected to remain for this season and probably into the second half of 2016,” said Matt O’Regan, the Westland chairman.

‘Ongoing growth’

Mr O’Regan noted the mounting economic concerns over China, the world’s top importer of many dairy products, whose step back from orders to rely on inventories has been blamed for fuelling last year’s slump in world prices.

However, terming Chinese dairy demand “steady”, he pinned the blame for lower values on expanding milk output in major northern hemisphere dairy exporting nations – contrasting with the decline in New Zealand volumes which giant Fonterra has pegged at about 4% so far this season.

“The major global driver of downward prices is the ongoing growth of milk supply in Europe and the US,” Mr O’Regan said.

‘Overpaying for milk’

US output rose by 0.7% in December to 17.45bn pounds, led by growing output in northern states such as South Dakota and Wisconsin.

In the EU, output soared by 5% in November, the latest data available, amid a continued jump in volumes following the ditching in April of production quotas.

The reform has triggered a surge in output in countries such as Ireland and Belgium, whose relatively warm and wet climates are beneficial for pasture growth and so cattle grazing, and what has been termed a land grab by processors wanting to maximise share in these expanded markets.

“Dairy farmers in Europe are receiving above-market prices for milk – due to processors overpaying for milk as farmers adapt to the removal of quotas and find a new sustainable farm gate price,” Mr O’Regan said.

This has kept EU milk production “higher than expected”.

‘Risky move’

The comments follow an assessment from the UK’s AHDB agriculture bureau that European Union dairy wholesalers were keeping prices relatively high in anticipation that a drop in market values in December would prove only temporary.

“Reports suggest sellers were not wanting to discount prices too much in anticipation of better prospects in the New Year,” the bureau said.

“It could be a risky move as January demand is traditionally not high and stocks could build, although seasonality in wholesale prices has not followed the norm for a while.”

‘Trending down’

In the US, a report from Dairy Management and the National Milk Producers Federation forecast a drop in milk production volumes to come.

Official data, at state level, “show that the annual rates of change in milk production have been trending down throughout this year,” the report said.

“This suggests that growth in milk production across the nation will continue to decline, approaching a standstill and potentially become negative over the next few months.”