As I reviewed the news and data of the past week I was struck but the current contradictions in the global dairy industry. Here is just a small sample:
- In Australia, the Coles supermarket chain has taken a stand against food inflation and current trends in milk price rises and slashed milk prices by about 30%. Further cuts to other dairy lines are promised. Meanwhile, Murray Goulburn, the major driver of milk price in Australia has put through a major step up in milk prices with more to follow in coming months.
- In the US the announced Class III milk price dropped to $13.48 / cwt (milk for cheese & whey). This was lower than last month and was 25% lower than the January price for Class IV milk (milk for skim powder & butter). Meanwhile, the CME futures exchange predicts price rise of 30 - 40% in both milk classes in February and March.
- In the UK a National Farmers Union report suggests that the cost of milk production is on average 29 pence per litre and the average milk price paid is 26 ppl. Unless UK farmers are incredibly public spirited, something doesn't add up here. Dairyco report that the average farmgate milk price of the past 5 years is 22.5 ppl and at the peak of the dairy boom in 07/08 only reached 27 ppl.
- In response to increased global demand and improved milk prices, Ireland boosted dairy production by almost 10% in 2010 when compared with 2009. This has put them at risk of exceeding their EU production quota limit, with substantial fines as a consequence.
There is an absolute wealth of topics to discuss here - the power of supermarkets in the food industry value chain; the reality of farmer profitability; dairy market volatility; government regulation and involvement in dairy markets; and much more. My time is however short and so I will focus on the last issue of Ireland and EU agricultural policy.
During my sabbatical last year I took time to visit Ireland and got just a small glimpse of their current plight ("Is the bear back in dairy trade?" Dr Jon Hauser, Xcheque.com, May 29 2010). At the time Ireland had experienced 8 consecutive quarters of GDP decline - a deep recession in anyone's language. Their economy has recovered a little in 2010 but it is going to take a while to fix their huge government debt and 13.5% unemployment.
Ireland doesn't have many options to quickly increase national wealth. Having adopted the euro they can't deflate their currency to increase the net worth of exports, lower their effective costs for investment, and encourage an influx of tourism. Knowing this, I wasn't sure whether to laugh or cry when I read the news that Ireland could be fined up to 28 cents per litre for milk produced in excess of their allowed EU quota.
In an environment where the world is crying out for dairy products, and prepared to pay a significant premium to historical price levels, it seems irrational to penalise Ireland for pursuing that opportunity, and especially given their current economic plight.
I know too little of the policy and procedures of the EU to say whether any fines would be imposed in these circumstances but surely sanity will prevail. The exceptional circumstances of the current market environment and Ireland's situation should be enough for someone in Brussels head office to mislay the policy document or accelerate their proposed reforms on milk production quotas. And won't it be a lot of fun when those reforms come through! If UK farmers think they have trouble now trying to make a profit at 26 ppl, just wait until Ireland and other low cost dairy producers get a chance to crank up production and have a better crack at the UK cheese and dairy ingredient market ... but that is a story for another day.
That's all for now ... I'd better get down to the supermarket and buy some cheap milk before Coles bow to public pressure and return prices to more normal levels ... or perhaps I should rush out and buy some of those NZX milk futures, they seem to be a bargain against the current CME Class IV futures price.