COMMENT: All change as dairy prospects brighten

Many commentators have recently forecast a fall in world dairy markets. It isn’t all bad news, though. Feed markets have also been expected to fall, following bumper harvests (see table below) in the northern hemisphere.

But there has been a bit of an unexpected development. Despite bumper harvests, grain and protein prices have eased. The record wheat harvest has all but disappeared and the stock-to-use ratio is at a 10-year low.

Maize is coming off the fields in the States, but is being sold at a record rate. Soya prices remain high, with hopes of weakening prices in the spring after the South American harvest. Then, last week, the Chinese press reported that up to 2 million cattle, many of them dairy cows, have been slaughtered in China this year, leaving the country with a forecast 5m tonne dairy product shortfall.

The Global Dairy Trade (GDT) auction price in early December rose 3.9% and, suddenly, the prospects for lower milk prices are in question. So what is happening?

China is key – we have known for a decade about its latent potential for food commodity demand. Compound that with a serious drought in China, seemingly under-reported, and we suddenly have Chinese demand putting us on the escalator to potentially higher commodity prices.

It was inconceivable two years ago that UK milk powders would compete on international markets, but we now have Arla placing UK product on the GDT auctions.

So, what does this mean for UK dairy? In the short term we could see international prices plateauing for longer as Chinese demand is met. Yet our access to those markets could be affected by limited UK capacity to process milk into dairy commodities.

So, with the potential for a large flush in the UK next spring, not all of the spare milk may be able to find a home in a higher-priced market. Producers linked with larger global players are likely to stand the best chance of benefiting from international markets. To reduce the effect of volatile milk prices, we could also see the development of futures-based milk trading and contracts.

In the longer term I suspect the implications are more profound. The ongoing rise in food commodity prices, combined with the improving competitiveness of UK dairy farmers, means there will be viable economic markets other than our traditional domestic market. Working with UK processors and retailers will remain fundamental – retailers will want to strengthen relationships to ensure security of British supply – but China and others may well also want our dairy products.

We have seen producer balance sheets start to improve as land assets and commercial returns recover after the doldrums of the nineties and noughties.

Processor returns have taken a hammering, squeezed between tough competition in the retail sector and competition for farm supplies. This has forced consolidation which, linked to growing world market opportunities, should start to offer global players a chance to increase returns on their investments.

John Allen worls for Kite Consulting. His areas of expertise include strategic planning, carbon reduction project management, marketing, supply chain management, change management and people management and he works with some of the UK’s leading farmers as well as major food and dairy processors and retailers.