Milking it: dairy outlook 2017

 

Early indications suggest that an improvement in farm milk pricing has the potential to be Irish agriculture’s good news story in 2017. eolas explores.

Irish dairy incomes reached record levels in 2014. This was followed by 18 months of negative price developments on international dairy markets, which only began to reverse in the middle of 2016. It is this pervasive international impact on Ireland’s milk sector, which continues to drive developments at farm level. Teagasc is now pointing out that the protracted trough in international dairy product prices may be coming to an end and an improvement in farmgate milk prices is in the offing.

However, one area of concern – particularly within the EU – is the large Skimmed Milk Powder (SMP) public and private stock level that has developed over the last 12 months. How quickly these stocks can be disposed of remains an area of uncertainty.

“As long as these stocks are withheld from the market they will limit the growth in commodity prices and farm milk prices,” said a Teagasc spokesperson.

“Equally, market demand will need to be sufficiently robust to allow stocks to be released without having an adverse impact on commodity prices. The improvement in milk prices is likely to coincide with the 2017 Irish milk production season, which should allow dairy farmers to derive a significant benefit from the strengthening milk prices.”

Teagasc points out that EU milk production is likely to continue to increase in 2017, but the growth in production is likely to be the lowest seen since milk quotas were removed, perhaps as little as 0.5 per cent. In 2017 EU dairy cow numbers are likely to see their largest annual reduction since 2010. However, the contraction in cow numbers should be offset by stronger growth in milk yields given the improved milk prices and low feed costs that should prevail.

Many dairy farms in Ireland continued to expand milk production in 2016. The possibility to produce more milk has allowed dairy farmers to exploit productivity improvements and spread fixed costs across a larger output volume.

For 2017, latest forecasts suggest a 2 per cent increase in US milk production. This increase reflects a combination of increased milk yields and a growth in cow numbers. Production in New Zealand is likely to resume growth at some point in 2017. Monthly production to date in the 2016/17 season has generally been on a par with the 2015/16 season. It may take until the 2017/18 production season before New Zealand production growth resumes.

 

“The dairy futures markets are reflecting a steady demand for milk for the next six months.”

On the demand side internal EU consumption should continue to increase, with stronger consumption growth for cheese and SMP than in the case of butter, where recent high prices are likely to constrain demand. The continuation of low crude oil prices may dampen dairy product import demand in countries where oil revenues represent a major share of GDP. Chinese dairy import demand may pick up further.

In spite of the continuing fall in milk prices in 2016, the removal of milk quotas saw Irish milk production increase by an estimated 5 per cent. According to Teagasc, this was achieved entirely through an increase in cow numbers of over 7 per cent. Average milk yields appear to have declined slightly in 2016, but Teagasc expects that, given a recovery in net margin in milk production, further expansion in Irish dairy output will occur in 2017. This expansion will be based on increased cow numbers and yield improvement, with a national average increase of 6 per cent forecast relative to the 2016 level a distinct possibility. A 6 per cent increase in total Irish milk production in 2017 is forecast, with a slight increase of 3 per cent in the dairy enterprise’s land base. A further increase in production in 2017 can be expected to lead to increased input usage on farms where expansion takes place. The extent of this increase will be highly farm specific.

For the year ahead, Teagasc is forecasting a 50 per cent to 70 per cent increase in Irish dairy farm incomes during 2017, compared with the previous year.

Irish milk prices will continue to be influenced by developments on international markets, according to IFA dairy committee chairman Sean O’Leary.

“We have continued to see a significant fall back in milk output across the EU, so there is every prospect of the co-ops responding accordingly,” he said.

O’Leary believes that the prospect for dairy prices remains positive right up until the end of June this year.

“I don’t think European farmers will be able to turn the milk production tap back on that quickly, such was the scale of culling that took place at the back end of last year. Many farmers will also prioritise on paying back debt, before they consider increasing output.

“All of this bodes well for Irish milk prices over the coming months.”

Irish Creamery Milk Suppliers Association Deputy President Pat McCormack agrees: “The dairy futures markets are reflecting a steady demand for milk for the next six months.

“That will bring us through to the second quarter of this year. After that, international supply and demand factors will determine the tone of the markets.”

He added: “Sentiment is now a key factor in determining the actual strength, or otherwise, of commercial dairy markets. All the signals are suggesting that market sentiment will continue to grow positively over the coming months.”

Kevin Lane, the CEO of Ornua, said he is hopeful that the industry is entering a phase where the returns to dairy farmers will be in excess of 30 cents per litre.

From an Irish point of view, Lane pointed out that worldwide low-grain prices are a negative, as they allow the high-input regions to continue to produce milk.

“From an Irish stand point, we would love to see grain price and concentrates quite high, which would suppress demand in those places,” he said

He added that the UK farming structure has been damaged with a lot of British farmers having sold off their cows. “But more recent information is telling us that they may recover faster if milk price reflects that,” he advised.

The Ornua Chief also highlighted the importance of oil prices and said once prices fall below $60 per barrel, it has a negative impact on the demand for dairy products in oil producing states.

While noting the recent upturn in dairy prices, Agriculture Minister Michael Creed outlined that there is clearly no room for complacency.

“While the medium term prospects for global dairy markets are good, the sector needs to work cohesively to deal with upcoming challenges such as price volatility and the effects of Brexit.

“Despite the recent prolonged global price trough, the long-term fundamentals of the Irish dairy sector are sound. The priority now, on foot of the emergent recovery, is on the development of measures which can minimise the effects of such downward volatility in the future.

“A key response to market uncertainty lies in the development and growth of international markets and to this end I have led a number of international trade missions this year including to Asia and North Africa. Further development of international markets for Irish agri-food will be a priority for 2017.”

When oil prices are in $70-80/barrel range, they don’t have the buying power or currency to be a big importer from Ireland or indeed the EU.

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