Commodities outlook 2015: Dairy

The dairy sector is facing a watershed in this country and those businesses that adapt best will build the future of the industry, says Tony Evans, head of dairy business at Andersons.

Over the past year, high production has come up against the Russian import ban, a slowdown in developing economies and poor demand from China.

Global dairy commodity prices have slumped, commodity stocks have grown, and UK retailers have capitalised on that.

See also: Five charts that explain the milk price crash

“There are no grounds for the domestic liquid milk market to be where it is – it’s just profiteering,” says Mr Evans.

“And I see that continuing until retailers have a change of heart or a shortage of liquid milk.”

As only 20-30% of British milk is likely to end up being exported, global markets should not be the key driver of domestic values, he adds.

“The problem arises when a processor can get more for selling liquid milk to a retailer than making it into powder, creating a spot market that undermines the liquid sector. We have to starve the market to drive the price up.”

However, the big event in 2015 is the end of milk quotas, which could result in more milk coming to the market at a time when demand is at its lowest point. This is likely to result in further consolidation throughout the supply chain.

“Prices could stick at low levels for a sustained period and producers with the highest production costs will be the first to go,” warns Mr Evans.

Fortunately, costs of production have fallen considerably, with fuel and fertiliser prices down by about 15% year-on-year.

“Don’t spend money on non-essentials – improve your efficiencies with every spend, and re-examine the marginal litre and the marginal cow – is there a future for them?”

Producers who can structure their businesses to survive the current downturn will emerge ready to take on the future, he adds.

“Markets are cyclical, therefore we will come out of this. The important thing is to be positive. A lot of businesses will benefit by adapting rather than quitting milk production, and while it is always tempting to halt investment in a downturn, capital spending, as long as it improves efficiency and profitability, is worthwhile.”

Outlook

• End of milk quotas means supply is set to exceed demand in medium-term
• Prices could remain low for a sustained period
• Further consolidation of supply chain highly likely

Business pointers

• Focus on reducing costs of production and investing to boost efficiencies
• Consider adapting business to secure future viability
• Make positive decisions about going forward, whichever route you choose to take