In the latest of our series exploring volatility, Joel Durkin examines the price roller coaster that is the dairy industry

The dairy sector is in the midst of a significant, yet slow-moving, shift to a globally traded commodity market.
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In past decades the industry was heavily managed, with various marketing boards and EU buying strategies ironing out bumps and dips in prices back to the farmgate. There was always a guaranteed market for milk, but the industry was not fully exposed to changes in demand on a global scale.
A gradual deregulation at both national and international level has meant an end to these days and, despite a largely liquid-focused domestic market which brings its own pressures to farmers, the UK is unable to ignore the highly commoditised nature of the global dairy industry.
The large swings in price have come, in part, as a result of moves from the EU in 2003 to cut the amount of surplus dairy stocks it held, which tightened world markets. The other major factor was food price spikes in 2007-08 as a result of the financial crisis.
Kevin Bellamy, dairy analyst at Rabobank, said: “The global financial crisis prompted huge swings in most financial commodities.
“Speculators moved out of financial markets into other commodity markets. I think this has continued and, as globalisation has taken place it has become more difficult to balance supply and demand.
“Those pressures came at about the same time as a change in EU attitudes to global markets.”
John Allen, of Kite consulting, said changes in the world industry had led to a general improvement in prices, but the fine balance meant small surpluses could change markets significantly.
 

FARMER CASE STUDY: TOM RAWSON

Tom Rawson is a director at Evolution Farming, a large dairy operation in Yorkshire and Lincolnshire. He claimed the last time prices were back to their current levels, the downturn did not last as long.
As farmers have little control over farmgate milk prices, Mr Rawson’s current focus is on reducing costs and making the most of his contract.
He said: “Making the most of your milk contract is an old and boring statement but it has never been truer. The more litres of milk per cow I can get the better price I will receive.
“Spring calving is not right for every farm but it works for me. I have to get costs as low as possible.”
This was underlined by Promar divisional director John Giles.
He said: “We have had, in the last few years, a combination of high and then low oil prices, the impacts of climate change, population growth, changing dietary patterns and the gradual deregulation of world markets. Put these all together and you get the volatility we are now experiencing.”
While the UK’s large volumes of liquid milk mean domestic influences play a big part of determining farmer returns, significant imports and exports of dairy into Europe and around the globe mean UK prices are intrinsically linked to the global trade.
This link to the world market is strengthened by the fact UK farmers’ two largest customers are pan-European companies.
Robert Harrison, dairy board chairman at the NFU, said Arla’s global focus meant the UK was reliant on European price trends.
“Ultimately, Arla is a global company setting its milk price in Europe. Every UK farmer is exposed to what is happening in Germany and other countries.”
A prime example of global volatility’s influence on the UK farmgate is the current commodity downturn.
High production globally over the past year has meant world markets are currently well supplied. This, combined with falling demand in China and a Russian import ban on Western goods, has meant UK average dairy prices fell back from 33.7 pence per litre to 25.45ppl in the year to March 2015.
While farmers in the arable sector have a variety of forward selling and hedging strategies to help manage volatile markets, the structure of the UK dairy industry means farmers are often reliant on the fortunes of their buyer in determining prices.
 

JOHN GILES’S TIPS FOR DEALING WITH VOLATILITY

«I think is it difficult for farmers to have any influence [on price] now – you need to manage your business as effectively as you can.”

  • Understand cost of production: “This is vital and farmers should look to be part of a benchmarking group.”
  • Join a buying group: “Think about joining a buying group and attending processor meetings.”
  • Think about capital expenditure: “Think about delaying capital expenditure if at all possible, but do not cut back on genetics because this will be needed when the upturn in dairy markets finally comes.”
  • Keeping track: “Looking at the GDT auction and the Fonterra’s price on a regular basis is vital.”
Graph

Gwyn Jones, chairman at DairyCo, noted the huge differences in contract prices between UK farmers.
“We have a big gap between the top end and the bottom end of contract prices. We are up to about a 14ppl gap and we have never had this before,” he said.
Experts often speak about the need for better tools to allow the dairy supply chain to manage commodity volatility cycles, and at the forefront of these is the possible creation of a viable dairy futures market.
Mr Jones suggested this would bring its own issues to the sector, as milk would often need to be sold forward at low prices.
He said: “If you are talking about dairy futures, people will need to talk about selling forward and what could be a good price to sell. Not many people can afford to sell too much forward at a lower price.”
Experts speaking to Farmers Guardian underlined the need for farmers to be constantly viewing information on the sentiment of dairy markets from DairyCo and the Global Dairy Trade auction.
But one of the overarching attitudes to volatility in the industry was it should not always be viewed as a threat.
Mr Giles said: “Processors probably need to develop better tools to deal with volatility, but none of these factors on their own will be a silver bullet. In our view, the market is still going to be a volatile place, but for the well informed and well prepared, volatility can bring opportunities too.”
 

FUTURE VIEW

Experts speaking to Farmers Guardian discussed a self-fulfilling cycle of increasing volatility. Prices rise so farmers produce more, then stocks build up and these prices fall.
Industry chiefs believe, with the global supply and demand strains on dairy commodities increased, the severity of these cycles could grow unless tools are developed to manage volatility.

 
Source: FG Insight
 

Mirá También

Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

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