Weather – the double-edged friend

May 30, 2018 | Making news | 0 comments

Home > Blog > NZ dairy expansion > Weather – the double-edged friend

Market cycles have little to do with rapid changes in demand – it is mostly about the effect of weather on supply, and how the demand side of commodity trade responds.

The spectacular turnaround in prospects for the world’s dairy markets since early 2018 has come from unforeseen major changes in weather. As the year started, European dairy farmers were being paid handsomely for their milk after the good dairy product prices achieved in 2017 and were gearing up for a belter of a season that promised expansion of 4-5% in milk output across their spring.

The arctic blast and following wet weather that seemingly hit Europe out of nowhere in March continues to play havoc with farm milk production across most parts of Europe. Cows were held indoors longer, while pasture and forage growth were smashed in Ireland, UK and France. The unthinkable happened on Ireland’s dairy farms – they ran out of feed as an industry, and were forced to import fodder from neighbours in the UK.

The eventual arrival of warm spring weather was far too late for the usual peak in milk flow, and as a result the aggregate EU peak is smaller and later.

As the impacts have gradually unfolded, the growth in EU’s milk supply fell behind demand and quickly pushed product prices much higher. The biggest impact has been on cheese – commodity gouda in Europe was being flogged for €2,200/t in late 2017 and is quoted today more than 50% higher.

The crash in prices for milk powders, butterfat and cheese late last year brought buyers to the market to take advantage of bargains. With a period of stronger prices seemingly behind them, the decks were cleared. Europe went into 2018 with the expectation of a lot more milk coming and continuing cheap prices, but without a lot of stock on-hand – except for the mountain of gracefully aging skim milk powder.

The combined effects of the weak spring and buoyant European consumers being able to afford to put more cheese and expensive butter on the table, has kept product supplies tight. The incredibly strong run for butter continues, now sitting above US$7,000/t in wholesale markets and buyers are still stumping up to cover their needs. Strong butterfat prices are at the core of milk value now, pushing up the asking price for cheese and as you now know, flowing across the world to keep prices for those commodities stronger in our region.

In the midst of this, the European Commission has been gifted the “get out of jail card” over the handling of its massive SMP intervention stockpile. Fresh supplies of SMP have been tighter as well, so the clearance sale of the commission’s stockpile has started strongly – without unsettling the overall situation. But that’s a whole other story.

Milk prices for European farmers have bottomed and are on the way back up as supplies remain tight. But the upshot of that means more milk as margins on farm get better and we go later into 2018, and that will in turn weaken the market, right?

Not so fast. The weather challenges don’t end there for European dairy farmers. An early hot summer has arrived on the heels of the chilly blast of the Beast from the East. Now those same forecasters that were predicting normal spring weather in January are saying the continent is due for a long hot dry summer through to September. The scenario coming into view is that milk output will continue to be constrained and product supplies will remain tight. Prices should stay strong, which might burn off demand in some markets over time.

The weather woes don’t stop there. Drought has hit the south west corner of the US and has already pushed up grain and corn prices. Dairy farm economics in the US are already fairly awful – not only with poor margins over feed costs and very weak livestock prices. Things are supposed to get better later in 2018 as better cheese prices arrive in milk cheques. However, what’s also going on in the background is a rising oil price, which drags up feed prices anyway as a bigger biofuel market for corn opens up. The relief in farm margins may not come if this drought extends and has greater impact on crops, so we could see US milk slow down. Slowing milk will lift cheese prices faster, and that is also good for our cheese market.

But the erratic nature of global weather giveth and also taketh away.

Those global forecasters – yep the same ones – are now calling an El Nino event to arrive in Australia and New Zealand for spring. It is said to be a weak event, but the change isn’t really news. The drying out of Eastern Australia has been going on for some time and is expected to get a little worse but you can already see it in your feed bills.

New Zealand had a shocker of a season last year and managed to keep milk output intact. Kiwi resilience will be tested again.

So the upshot for Australian dairy farmers? The northern hemisphere will get tighter and put upward pressure on southern 2018/19 milk prices, and likely push them beyond $6/kgms. That’ll be critical as feed bills will be sharply higher. It’s how well you manage and protect margins that will define your season.