Dairy volatility predicted to get worse in five years

Dairy farmers across the world face increased price volatility as global milk production gears up to expand by a predicted 120m tonnes to 800m tonnes over the next decade.

Their main challenge will be managing the risk to their businesses, according to New Zealand milk giant Fonterra.

Paul Campbell, the firm’s strategy manager, told an audience of First Milk producers in Kilmarnock that farmers would find it difficult to manage the increase in volatility, which he predicted would begin within the next five years.

He said they would have to look carefully at their balance sheets, work out how much debt and equity they had and how they could hedge fluctuating prices.

Forecasts of production growth had been accurate in the past, he said, and there were big implications for farmers and land prices everywhere if India, China, the USA, Pakistan and New Zealand expanded milk production as predicted.

“It means that milk prices in all countries are likely to converge and the price in the UK and New Zealand, for example, may well be set by a marginal producer in Argentina or a marginal consumer in China.

“It will be very hard to escape the economics of this as these markets grow,” he said.

“It won’t happen overnight and farmers shouldn’t be afraid of it, but the threat of increased volatility means they need to change the way they arrange their businesses in order to cope. We are crying out for tools to manage that risk. Substitute products have these tools in place today so they can hedge their bets already.

“It will be a problem for all of us if our customers and consumers use non-dairy substitutes because they can manage risk. That’s why we need to find solutions to volatility.”

Mr Campbell said farmers would adopt different technologies to increase their margins, such as increasing scale, introducing better feeding regimes or improving genetic selection, although in New Zealand the introduction of GM technology would be “a step too far”.

Future opportunities for dairy farmers include the development of nutrition products and Fonterra, which spends £50m a year on research and development, has several in the pipeline which Mr Campbell declined to reveal. He added that food security and reducing wastage were other big issues.

“Some 20-30% of milk solids produced on farms never makes it to the consumer. That provides us with opportunities because we need to feed more people globally and an important part of that will be reducing wastage,” he added.