Interesting times ahead for world milk markets

By Olli Niskanen, researcher at Luke, Finland 

After the milk crisis of 2015-2016, demand for milk on international markets eventually outpaced supply, and prices began to recover. This is the first market-driven growth period in Europe since the removal of production quotas.
World milk production in 2016 was 845 million ECM tones, according with data from the International Farm Comparison Network (IFCN). This was the smallest increase in production since 1997, 1.1% compared to 2015. Over the period 1996-2015, the annual average production increase was 2.4%. This low growth rate is largely due to the tough financial situation in 2015-16 in all the main milk production areas. European Union (EU) measures to reduce milk production also had little effect on limiting growth, or at least postponing it.

The shift in balance between supply and demand eventually led to price increases. In 2017, growth in demand was focused on full fat rather than skimmed milk powder (SMP) however, which suffers from significant EU intervention measures leading to SMP mountains, that has to be sold at some point.

Greater price fluctuations between countries

The average price of milk at a global level was 24.4 euro cents per ECM kg in 2016. The lowest price recorded was 18.1 and the highest 95.5. Global milk price increases filtered down to farm level at varying speeds in different countries, mainly driven by national production systems and the political environment. The price of milk has never fluctuated as wildly as now, a sure sign of change in markets.

In 2017, the countries that gained the most from increased prices were relatively high exporters of butter. The average price of milk rose to 31.7 euro cents per ECM kg in 2017. Some small fluctuations in farm gate prices also contributed to a higher milk fat percentage value, but as market situations are changing all the time and production cannot immediately react to these, adjustments are not very significant.

Europe face new challenges

Demand driven growth on world markets remains slow. The price differential between fat and protein has reduced general price growth in many countries. In Europe, we have entered the first growth period since the removal of production quotas. Production can now grow with in-creases in demand.

It’s somewhat inevitable to suppose that there will again be a surplus of production when the market situation eventually changes again. Hopefully, farmers in central and eastern Europe will bear this in mind when planning future investments.

Adjusting to tight economic situation

Production costs vary significantly between different areas.  According to IFCN data, the aver-age cost of milk production in western Europe was 47 cents per ECM kg in 2016.  The comparable production cost was 40 cents in North America and 27 cents in Oceania. The lowest production costs are found in Latin America, central and eastern Europe, New Zealand and some areas in Africa. 

The general average production cost for all farms included in the analysis was 34.7 euro cents per ECM kg. 43% of these farms made enough profit to cover the farmer’s salary and production costs. Farm revenues were not sufficient to cover salary and capital interest costs at the remaining 57% of farms. 

Over the last few years, production costs have dropped substantially. In 2013, the average production cost in general per ECM kg was 43 euro cents. The main reasons for lower costs are lower feed prices and currency exchange rate fluctuations. However, farmers have also had to tighten their belts and become increasingly cost conscious. 

Economies of scale

On a global scale, labour is expensive in northern Europe. Increasing farm size has been a key measure to increase labour productivity, i.e. milk per working hour. Western European farms produced on average around 200 litres of milk per working hour. Again, there is a big variation between farms: a large farm of 350 cows could produce more than 400 litres, whereas a farm with 29 cows produced 45 litres per farm work hour.

Nordic farmers cannot compete globally on production costs alone, however, they should seek to cut costs. Larger farms do lead to increased productivity and greater cost efficiency. However, market volatility makes investment more risky than before. 

Developing countries

In many developing countries there is a big interest in developing and growing dairy business on domestic markets. Such growth cannot be achieved simply by increasing the size of farms as this will also require major investment in dairy infrastructure, from milk collection, cold chains and storage. 

Dairy production is growing rapidly, especially in India. There, cows not only play a huge role in human nutrition, but also in religion and the entire culture. Currently, milk production in India is on a par with total European production, which is roughly 20% of global production. A doubling of production from the 2015 volume by 2030 can be expected. The growing number of cows brings other problems with it. For instance,  over 80% of the population of 1.3 billion do not eat beef products, a large part of dairy production. Much of this surplus meat is exported, but it is a very sensitive issue that can also cause conflicts.

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