More market volatility likely post milk quotas

The anticipated increase in EU milk production following the abolition of quotas in 2015 is likely to result in greater market volatility, The Dairy Group has warned.

Dairy producers should be aware of the sensitivity of markets to supply changes – an example being the recent 20% leap in prices at Fonterra’s auction on the back of a late season drought in New Zealand and Australia. Together with a delayed spring in the northern hemisphere, this has resulted in a commodity price hike, said consultant Nick Holt-Martyn.

An increase in production of just 1% in the top eight EU producing countries – France, Germany, Ireland, Italy, the Netherlands, Poland, Spain and the UK – which account for 83% of EU milk deliveries, would be the equivalent of an average New Zealand increase in growth. This has been 1.234m tonnes a year over the past four years on average, said Mr Holt-Martyn.

“The fears of EU production growth are not without foundation,” he said.

“In the absence of milk quotas PLCs are likely to insert stringent volume controls into contracts. However, by contrast, most co-ops are not in business to tell their members how much milk to produce, only to get the best return from the market for the milk they receive.”

The effect on milk price could be significant, he warned. “In the US, where supply and demand are more regulated by market returns and the economics of production than weather, it is generally believed that a 1% change in supply triggers a 10% change in raw milk price.”

It was impossible to predict how the markets would be operating in 2015, but producers should be aware that the greater the lift in production, the more significant the price adjustment could be, said Mr Holt-Martyn.

“The effect on EU dairy economics are plain to see and the intervention of the European Parliament to insert market management into CAP reform is welcome,” he added.

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