Volatility is the buzzword of the year. Recent talks between dairy farmers and government in the US and Europe have attempted to find a solution to this problem of cyclical and unpredictable milk prices. I don't have an answer to the problem here but I can report the level of variability that has been seen in the dairy markets of Europe, the USA and Australia. This blog chronicles a sort of league table for volatility over the past 15 years. To see who has had the worst of it read on.
This apalling batch of colored spaghetti shows the variation in milk price from month to month for the USA, Australia, the UK and France. All prices are indexed to July 2000. It makes no sense at all until you switch off some of the lines (just click in the colored key of the legend).
Comparison in this way takes out the effect of different currencies and absolute milk prices. We are comparing the variation from a local farmers perspective rather than the nation to nation price differential.
Australia in particular looks horrific but that is because there is significant price variation across the season to counter the milk shortfall in the winter months. This variation is however reasonably predictable once a base price is set - the factories do not change the seasonal incentives very often.
By taking a 12 month moving average the regular seasonal pricing variation can be eliminated and the chart becomes a little more legible.
The smoothed data shows that Australia, the UK and USA have had the worst of volatile milk prices. The French price has been very stable apart from a short excursion up and down when the world went mad during 07 / 08 / 09.
(For our New Zealand readers the 12 month moving average for Australia is pretty much a proxy for the NZ milk price trend).
All very interesting but what is this really saying and who can lay claim to the most volatile milk price?
For me the most interesting data is that of the USA. A regular cycle of volatility has persisted for 15 years. The peaks are about 3 years apart with a fall to a rougly similar level in between. There is no doubt that the supply / demand balance in the US is the principle driver of this cycle. In a perverse way the market behaviour is comforting. It is to some extent predictable and it would be more of a worry if there were prolonged periods at the low points.
Australia and New Zealand look like they are trending towards the US cycle. In the short term that will be a positive as it will mean a lift in the long term average price. In the longer term farmers will need to be very careful to avoid getting over excited about the periods of peak pricing. Their businesses need to be designed to withstand the troughs in price. The major risk in this regard is overpriced land and excessive debt.
Europe is at an interesting stage. They have clearly been protected from much of the long term volatility. The reforms that are under way look like removing the security blanket of export subsidies and production quotas. A less regulated market is likely to show similar volatility to the USA and Oceania - a prospect that is no doubt generating some interesting discussion in the corridors of power.
