Category Archives: European Union Agriculture

Positives in low prices for ‘Saudi Arabia of milk’

2055756There are positives for New Zealand in low the current low milk prices. These low milk prices will benefit the New Zealand dairy industry in the long term as it will limit the size of European expansion.

There is a cost war is going on between New Zealand and Europe at the moment. Quotas have come off production in Europe so they are expanding milk production.

EU skim milk
Growth in exports of European skim milk powder

This is similar to what is happening in oil with expanding production due to shale gas. With oil, the low prices are benefiting the low cost producers such as Saudi Arabia can produce oils for $10-$20/barrel. Whereas shale gas oil costs $50 to $100/barrel.

Ireland, for example, is planning to increase milk production by 50 per cent.

New Zealand is the Saudi Arabia of milk and we can be the lowest cost producer, but dairy farmers need to focus on grass based production to weather the storm. Grass will always be the lowest cost source of feed and New Zealand has the most efficient grass- based dairy system in the world. “Ireland can grow grass too but currently they utilise less than half what they grow. The large housed dairy operations in Europe are also only profitable at high milk prices.

We need to focus on what we are good at, which is grass. The halcyon days may be gone for a while though and we are unlikely to see high prices again soon. It is going to be a slow recovery of price and dairy farmers need to be able to be profitable at $5/kgMS or they won’t survive. The average milk price over the last 10 years was around $5.50/kg MS.

Trend in global dairy prices
Trend in global dairy prices

It is likely that this will be similar over the next decade as well. What we are seeing though is greater volatility. This is going to continue so farmers need to have systems that are still profitable when the price is low. The most resilient system is the low input grass based system.

As an economy we also need to see the opportunities in other areas, he adds.For example there have been record high returns for beef in the first six months of this season, with the average per tonne value up 28 per cent. Beef is a great story with China needing to increase its beef imports by up to 20 per cent a year for the next five years to meet its surging demand for protein.

The majority of our dairy exports exports are commodities
The majority of our dairy exports exports are commodities

Lamb also has good prospects, and there are other opportunities, such as can be seen with the growing sheep dairy industry. We also need to continue to focus on growing the value of our dairy exports by moving away from exporting commodity whole milk powder.

The challenge of marketing New Zealand Food and Wine

Knud_149Today I begin three weeks of research interviews in Europe on how to increase the value of New Zealand food exports by communicating the “credence attributes” to consumers (see current research for more information). “Credence” means things like our clean green image, animal welfare, food safety or anything else you can’t experience by consuming the product.

I will try to share some of the experiences that won’t be so easy to describe in a written research report, and also encourage readers to make comments, as many of you will have had your own experiences and thoughts that can add to this.

If you want to follow this then please like this on Facebook or subscribe to my page nicleesagrifood.com

Credence: belief as to the truth of something: in other words attributes that need to be taken on trust, you cant experience them in the product as you can with taste or appearnance

Will increasing EU production affect New Zealand dairy export prices?

Cows-in-the-Field2015 is the last year that the EU will have a quota on milk production (expires 1 April 2015). This means after that there will be no restrictions on increasing milk production. Currently if farmers produce over their milk quota they pay a penalty of 28 EUR/100 kg. In countries like the Netherlands the current high milk price means farmers are producing above quota and willingly paying this penalty.

EC’s quarterly agricultural outlook shows that the number of EU dairy cows increased significantly in 2013. The 2013 increase was greatest in the Netherlands (+3.6%), Spain (+3.6%), Ireland (+2.1%), Germany (+1.8%) and France (+1.5%).

Should New Zealand dairy farmers  fear surging European Union milk production where there are 22.8 million dairy cows compared to less than 5 million in New Zealand.

Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission - DG Agriculture  and Rural Development
Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture
and Rural Development

 

The reality is that most of the European Union milk production is consumed internally. Even so the European Union (EU) remains the one of the world’s major dairy exporters accounting for about 32 per cent of all export sales on a milk equivalent basis. Most of this comes from three countries, Germany, the Netherlands and France (see Figure 20).

The good news for New Zealand is that most of this is exported as Cheese. The European dairy industry is set up mainly to produce fresh milk and cheese, producing about 40% of total world cheese production. This means most of the increase in European production will go into cheese exports

Although  only producing 3 per cent of world milk output, New Zealand is the second largest supplier of manufactured products to the world market with a 32 per cent share. However the largest share of this goes as whole milk powder. Cheese exports represent only about 15 % of New Zealand exports.

Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission - DG Agriculture and Rural Development
Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture
and Rural Development

So there may be a significant increase in production from the European Union, stimulated by high prices and the removal of quota, however this is most likely to affect cheese and skim milk powder exports. Figure 13 shows the changes in European dairy product exports and it can be seen there is significant growth in skim milk powder and cheese.

The removal of quotas in 2015 is likely to result in a decrease in small farms and an increase in larger operations in countries like Germany and the Netherlands. The long term effect is that the European Union is likely to become a stronger competitor on the international market as the industry in these countries become more competitive and able to respond to market signals.

In the long term New Zealand must remember that it is a small player in the overall dairy production market. Small changes in production and exports in the European Union or the US can have big impacts on the small percentage  of dairy products that are traded (About 7 per cent of global milk production is traded in international markets each year). Small changes in demand for imports from countries like China can also impact significantly on dairy prices. The one thing that is for sure is that record dairy prices won’t last for ever. High prices will stimulate an increase in production from the most efficient producers until prices reach a new equilibrium. In the long term New Zealand will still have to be innovative in production and marketing to maintain its competitive advantage in the brave new word post EU quotas.

The full Ernst and Young Report : Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture and Rural Development. Is available on the resources section of this site click here