The world’s largest dairy exporter has potentially triggered an international milk price war after the group slashed its forecasts amid an unexpected slump in demand from China and a glut of supplies flooding the international market.
Fonterra – the New Zealand milk co-operative – shocked dairy farmers around the world last week after it cut the estimated price it now expects to pay its members by 14pc to NZ$6 (£3.03) for a kilogram of milk solids in the year ending in May 2015.
“We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices,” said Fonterra’s chairman John Wilson.
The sudden weakness in global milk demand has come as a surprise to many farmers who have grown used to rising demand for dairy from Asia’s fast growing economies. China is forecast to become the world’s biggest dairy consumer by 2018, with the government actively promoting more calcium in the Chinese diet.
This has led to a rush by dairy farmers around the world to expand their herds and increase production. Across the world’s major dairy producing regions, output was up by 18pc in the first quarter.
However, a recent build of Chinese whole milk powder and whey inventories has raised concerns that the government has been stockpiling to protect the world’s second-largest economy from inflation that could be caused by agricultural commodity prices rising too quickly.
According to GlobalDairyTrade whole milk powder prices fell to the lowest since late 2012 in last month’s auction and have dropped 39pc since hitting a peak earlier this year.
Although relatively small players on international dairy markets, some experts fear that UK dairy farmers could be caught in the middle of a damaging international milk price war.
“The biggest immediate challenge we’re now facing in the UK is the slow down in demand that is beginning to be felt from China,” said one UK producer following Fonterra’s announcement.
British dairy herds are already preparing for increased foreign competition as Europe gets ready to end from next year onwards its system of milk quotas that were first introduced in 1984 to stem the problems of “butter mountains”.
According to the latest figures from the European Commission, dairy production across Europe is already at historic highs. Milk deliveries throughout the economic bloc were up 6pc in the first four months of 2014, compared with a year earlier. Although the UK has operated well within the quota system over the last decade analysts are concerned that excess production will now flood into the domestic market, hitting prices at the farm gate.
“The key impact on the UK industry will be an increased exposure to competition as there will generally be more milk on export markets,” said Patty Clayton, senior dairy analyst at AHDB Market Intelligence.
Greater market volatility is leading some British groups to look at options such as establishing a UK based dairy futures market that would help farmers to plan ahead more efficiently and cope with international competition. A futures contract works by allowing a buyer or a seller to agree on a transaction for a commodity at a fixed price and specific time.
“Our view is that the European quota coming off will only add to the volatility of the market we’re in,” said David Herdman, Chairman of Dairy Crest Direct.
Mr Herdman, who farms a herd of 200 dairy cows in Cambridgeshire, is leading a review by the suppliers group into possibly establishing a British dairy futures market that would help to regulate the industry’s boom or bust cycles.
“It’s early days and we’ve held preliminary meetings but there are no concrete conclusions so far,” he said.
US exports first oil since 1970s
A watershed moment in world energy markets occurred late last week as the US exported its first oil in over 40 years.
A tanker loaded with $40m (£23.7m) of ultra-light crude known as condensate set sale for South Korea from a port in Texas.
Although the US has not officially lifted its ban on crude exports that has remained in place since 1979, authorities are considering a number of special applications for shipments in what some experts believe is a precursor to a change in the law.
It is thought that the US could easily export 800,000 barrels per day (bpd) of light oil and condensate in the future as the development of shale resources reduces the country’s dependence on foreign imports. Oil production in the US has rocketed up by 48pc over the last three years to around 8.4m bpd.
Although US domestic oil inventories fell last month, America has a near record amount of crude held in storage that could be dumped onto world markets. Earlier this year, the government sanctions the domestic sale of 5m barrels of crude from the vast 700m stockpile held in the Strategic Petroleum Reserve.
The expectation that America is preparing to fully restore oil exports has helped to keep a lid on crude prices despite heightened levels of geopolitical risk in the Middle East and Ukraine.
US steel demand surges
New figures for global steel demand have provided the clearest sign yet that consumption is finally picking up in developed industrial nations. Demand for steel in the US grew by 12pc in the first half on 2014, reversing a 7.2pc decline a year earlier, according to data compiled by Macquarie. The pick up in North America has seen world steel demand return to an average of around 450m tons per year, a figure last seen in 2008. At the same time, demand for steel in China has slowed dramatically in the first half growing by just 0.6pc, compared with a rate of 11.2pc in 2013. “The shift in end-demand growth from emerging to developed markets is clear,” said Macquarie in a note.
Source: The Telegraph