Dairy Market Report Q1 2016

As we enter into a new year it is perhaps best to start with a look back at 2015 and the conditions which have created the current supply heavy situation. There were continuous drops in price throughout 2015 yet again which has forced the milk prices across the globe to drastically reduce. There was an exception to the trend in Spring 2015 as there was an increase of dairy prices in the EU due to many of the larger processors being over quota which briefly halted production. However the European milk quotas were removed in April which has had the expected massive effect on the global market. There was a huge surge in milk production yet again as many farmers had prepared for the abolition of quotas by investing heavily to expand their facilities and capacity.

The long-awaited new era has begun in Europe as a result. However when the abolition of quotas was announced a few years ago, market observers did not expect Russia’s withdrawal from the EU market. Russia accounted for over a third of EU dairy exports before they announced a trade sanction in the summer of 2014. The whole EU market is still feeling the knock on effect of this seismic event as the current situation would not be so concerning if Russia had continued to maintain their position as the largest consumer of EU dairy products. The Middle East and China have not filled the void left by Russia so far and predictions of potential economic turmoil in China especially have further dampened expectations.

All of these factors have contributed to the situation today which is threatening the livelihood of many farmer milk suppliers in the EU. If milk prices continue to fall in the same direction, many farmers will be left with no choice but to exit as they struggle to make a living. Observers have predicted that it will now be 2H 2016 at the earliest before we start to see some sort of price recovery. There has been an increase of consumer demand in the EU but not nearly enough to have any sort of effect on the market so far. The production season was also weak in Oceania with a drop of nearly 10% in terms of milk supply but even this has still not affected the global market greatly as the EU continues to be the driving force of low commodity prices. There will need to be a slow down of production in the EU over the next six months to finally initiate a price recovery.

An example of efforts to halt milk production in the EU can be seen in the Netherlands where the top milk producer, Friesland Campina, have offered incentives for their suppliers. They have put forward a proposal where they will pay their farmers €2 per 100kg of milk supplied if they either maintain or reduce their production levels. This is effectively a 5% income bonus for their 20,000 members and highlights the desperation some dairies are feeling as they are unable to cope with the excess stock. The Dutch Dairy Producers Union president, Harm Wiegersma, expressed his alarm at the situation which forced Friesland to implement such measures. He was quoted as saying the decision to remove quotas will go down as a ‘historic mistake’. We will see if his prediction rings true!

There were further indications of tough times ahead for the dairy industry in 2016 if you were to consider the opinions of experts at the Irish Grassland Association held in Limerick in January. The subject of the conference was ‘The Ability to Overcome Volatility’. Tadhg Buckley of AIB reported that since 2007 milk price volatility over any given three-month period has increased by a mind-boggling 300%. However he also provided cause for long-term optimism as he stressed that it is still possible for farmers to get through these challenging times by having simple and stable farm systems along with strong financial awareness. The importance of strong people management skills were also stressed to help when dealing with banks and making important, timely decisions which could be critical during the coming year.

I would like to take the time to thank all of our loyal customers and suppliers for their continued support throughout 2016. We have enjoyed another successful year at Ingredient Solutions but this would not be possible without you and your loyalty in tough market conditions is very much appreciated. We are hoping to witness a recovery of commodity prices at some stage in 2016 as we believe the current situation is unhealthy and their needs to be rapid action taken to ensure we do not experience another year of extremely weak commodity prices. Relief should be granted if we see a significant reduction in European milk production but of course it is not ideal that such measures have to be taken despite the removal of the historic restrictions of milk quotas.

However we have to face reality and take any necessary measures to ensure the livelihoods of thousands of European farmers are maintained. We have monitored the market closely throughout 2015 and we ensured our customers were also fully aware of any movements. This is an especially important time to be fully aware of conditions in the dairy industry and we will remain wholly committed to providing an expert opinion in 2016 to make sure our customers get the right deal. We wish a Happy New Year to all our customers and we will look forward to working with you to achieve a successful and prosperous 2016.

Yours Sincerely

Ian Galletly