It's interesting to see what can happen when you put a reasonable milk price and lower feed and fertiliser costs in front of dairy farmers. While Xcheque has been busy rebuilding our website, dairy farmers around the world have been increasing milk production (at an alarming rate). This week I thought our readers might like to catch up on the latest data for EU, USA, and Australian Milk production.

Starting with the easy analysis, Australian milk production has staged a remarkable recovery in the past 4 months. During 2009 the Australian industry was in the depths of despair with the lowest milk production in over 10 years and completely unsustainable milk prices. Milk price improved in early 2010 but more importantly, feed price dropped back towards the 10 year low point and SE Australia had the best Autumn break for many years.

Source: Dairy Australia

The milk production chart clearly shows the turnaround when the rains came. Up to February 2010 production was down 6.4% on the previous year.  From March to June the increase on the previous year was 2.9%, bringing the full year result to just a tick over 9 billion litres and 4% below the previous year.

Over in the USA dairy farmers have been chasing the improved milk price with increased cow numbers (up about 0.7% or 60,000 cows since December 09) and their ongoing improvement in milk production per cow (up nearly 4% since December 09). We like to show the USA milk production in a standardised chart which takes out the normal seasonality of supply.

Source: USDA

In this chart both milk production per month and milk production per cow is adjusted for the monthly variation above or below the running average. If you zoom in to the most recent data you will see that milk production per day has increased from about 236 million litres per day in January to 243 million litres in July - roughly a 3% increase with most of this coming from milk production per cow. This level of increase is within the normal variation attributable to changes in feed supply but it is also clear that management and genetic improvement continues to march forward with the ongoing improvements in the productive capacity of cows.

June data for Europe also shows a remarkable recovery in milk production. The chart below shows the daily milk production before and after standardisation for seasonal variation. You can also see the % change in the standardised figure.

Source: Eurostat

In January Europe was running at 6 million kgs / day below their long term average milk production of 367 million kgs / day (and therein lies the reason for the higher commodity prices in the first half of 2010). Since then milk production has been increased to 15 million kgs / day above the long term average. It is a 6% turnaround in just 6 months. We should not get excited about one month of preliminary data but it is clear that the EU is now running ahead of their historical production levels by at least 2 - 3%.

We would like to bring you New Zealand's figures to complement this analysis but unfortunately it can be a bit hard to get hold of on a monthly basis. We'll keep trying.

And what does all this mean for the world of global dairy trade? Well if you are a dairy farmer then quite frankly the news is not good. On an annualised basis a 3% milk production increase in Australia, the USA, and Europe represents 5 - 6 billion litres of extra milk on world markets. To add to this, Europe still have 240,000 tonne of SMP intervention stock and can't find a buyer at the current market price. I wouldn't go so far as predicting another crash like we saw in August 2008 but the next 3 months will tell the tale. During this period Australia and New Zealand start pushing their spring production onto world markets and will get just a little bit desparate if nobody is buying. Seatbelts on please, it looks like there is turbulence ahead.