2010 could be the year for dairy farmers to reinvest

During the summer production trough the Eire market holds sway on milk pricing, while in the autumn/winter the UK market is the driving force. With Eire prices languishing at intervention level, the Northern Ireland farmers have had a tough time with prices averaging 17.9p/litre compared to a UK average of 24.6p/litre so far this year.

The dairy market is now moving up again and the upturn in commodity prices has seen average market returns in the UK as a whole rise by 8% since April to 27p/litre and in Northern Ireland 10% since June to 21.75p/litre. When October data is available it will undoubtedly be higher again due to further weakening in exchange rates (down 7.5% since June) and firmer markets. Farmgate prices will have to respond this autumn or dairy companies could be accused of profiteering.

The reason for the turnaround in the dairy market is global, with milk supply now static on both sides of the World. The EU is static in 2009, New Zealand is likely to be +2%, Australia is about -1% and the USA is static. Low prices through 2009 should limit any increase in global supply until at least mid 2010.

Normal market demand has been weak due to the global recession. However, large intervention buying in the EU and USA has removed about 25% of skimmed milk powder (SMP) production which has itself seen an increase as manufacturers took advantage of intervention.

During times of market weakness there is a switch away from commodity cheese and whole milk powder (WMP) to SMP and butter (invention products). Intervention stocks are now at their highest this decade providing the market managers in Brussels with a familiar problem.

This overhang presents a challenge as politically there is a desire to see milk prices rise, but rising milk prices may encourage further production adding to the level of intervention buying next summer. Brussels needs to manage the market carefully if the balance between farmgate milk price and milk production is going to deliver a soft landing – politically and economically.

The prospects for milk price rises this winter and later in 2010 are favourable, but this will be tempered by the level of intervention stocks. The UK currently lies in ninth place in the EU milk price league, just above average, but below Italy (forth), France (fifth) and Netherlands (eighth), so the issue of a fair share of market returns still persists.

The weakness in sterling has lifted the intervention floor up to 19p/litre equivalent. If the market management is successful we should see a commodity base about 22p/litre, cheese suppliers about 25p/litre with the retailer aligned liquid suppliers at 27p/litre This would be an increase of 2p/litre above the current level.

The Bank of England is forecasting five years of weak exchange rates which would require a long period of EU market management translating into stable and favourable UK prices. With stable prices, low inflation and low interest rates, 2010 may turn out to be the time for dairy farmers to reinvest.

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