Dairy farmers must get used to milk price swings even worse than this year’s collapse, according to a leading analyst.
Torsten Hemme, managing director at the International Farm Comparison Network (IFCN) dairy research centre, said farmers could see prices move 50% once or twice every 10 years.
He said 20% swings, close to what British producers have faced in 2014-15, could become the new normal and managing that risk was the biggest challenge in the industry.
Mr Hemme explained how nearly all the world’s milk will be priced at global market values in the long run, with special supermarket contracts the only chance for the UK to be slightly insulated.
He told Kite Consulting’s Progressive Dairy Operators Conference on Monday (23 March) how farmers lacked tools to manage that volatility. This was particularly true for larger, higher-input systems, which lacked the inbuilt buffer of family labour on smaller farms.
IFCN’s Torsten Hemme soundbites
- “People spent by far too much time thinking still about milk quotas which had been for me gone three years ago.”
- “We are in a very emotional market. One big thing to take out volatility is to bring more rationality and facts into the dairy market.”
- “We think that this tremendous amount of additional milk can be produced if we have the right milk price, the right feed price, the right weather and the the right policy. If one of the four is missing, it is not possible.”
- “The availability of land is not a limitation, it is our perception. What is a limitation is our ability to pay for it. Sometimes people say I can’t get workers. There is no shortage of workers on the planet; it is just the limitation of your ability to pay.”
“In most cases, all the risk is put on the dairy farmers in the chain – the milk price risk and the feed price risk,” Mr Hemme said. “I have to address that to the processors, farm input suppliers and the retailers.”
“Right now I don’t see any opportunities like [a futures market]. We don’t have sufficient liquidity and we have a tremendous lack of knowledge of how to use them.”
Despite the risks, Europe and the UK should be in prime position to tap into growing world demand, Mr Hemme explained.
IFCN’s 10-year outlook expects the world to need more than 1,200bn litres of milk by 2024 – 30% more than today.
This demand would come from population growth and per capita dairy consumption rising 14% to 126kg.
To meet it would mean more than New Zealand’s annual milk production coming on stream every year.
IFCN predicts the world milk price to average 29p/litre over the next 10 years, but farmers would have to cope with feed costs much higher than today’s low levels.
Mr Hemme said the EU could take over from New Zealand as the leading dairy exporter, producing 12% more milk.
He added that the continent had distinct advantages as a dairy region: a temperate climate suited to high-yielding dairy cows, good water availability and a weaker euro against the dollar making production costs more globally competitive.
“We predict probably the costs of a 100-cow dairy in Germany is [now] less than a 500-cow dairy in Wisconsin, just due to currency developments. Overnight, a fantastic opportunity for Europe,” Mr Hemme said.
“The devaluation of the pound was not as strong but, still, it is something.”