A new round of low global dairy prices: how should we respond?
Since March 2015, global dairy auction prices have continued to decline, and in July global milk powder auction prices even plunged. Similar to the price trend in the futures market, since April this year the spot price of milk powder on the international market has also shown a sustained decline. The plunge in international dairy prices has pushed down global raw milk purchase prices, and dairy farmers in major milk-producing countries have suffered severe losses in farming returns. According to statistics from the International Farm Comparison Network (IFCN), in June 2015 the global raw milk purchase price was 0.287 US dollars per kg, equivalent to 1.75 yuan per kg, down 5.6% month-on-month and down 35.7% year-on-year, the lowest price since December 2006.
Under open market conditions, China's dairy industry shares the same warmth and cold as the rest of the world. Although current monitoring data from the Ministry of Agriculture show that in July the raw milk purchase price remained at 3.41 yuan per kg, considering dairy companies' purchasing measures such as “limited volume” and “fixed quota”, the actual raw milk purchase price should be far below this level. In some areas of Shaanxi, Gansu, Ningxia and elsewhere, raw milk purchase prices have already fallen below the cost price, and the farming returns of dairy cattle farmers are not optimistic. As farming returns continue to decline, the phenomenon of “dumping milk and selling cows” is still continuing in some places.
Increased supply and slowing demand directly lead to the downward trend in international milk prices
⟧ The increase in global raw milk supply directly drives the continuous decline in international milk powder prices. In response to China's continuously growing market demand, in recent years countries such as New Zealand and Australia have expanded dairy production, and coupled with better climatic conditions in the 2014/2015 production season, raw milk output in the world's major milk-producing countries has all been better than expected. According to statistics, from January to May 2015, New Zealand's raw milk output was 8.283 million tonnes, up 0.8% year-on-year; Australia's raw milk output was 3.594 million tonnes, up 2.99% year-on-year; the United Kingdom's raw milk output was 6.2181 million tonnes, up 1.20% year-on-year; and the United States' raw milk output was 39.9284 million tonnes, up 1.65% year-on-year.
The slowdown in Chinese market demand and the extension of Russia's import ban have made it difficult to boost global milk prices. China's milk powder imports account for more than 1/5 of global milk powder trade, and changes in its demand directly affect international milk powder prices. Over the past two years, excessive milk powder imports have directly led to increased inventories at domestic dairy companies, while domestic dairy consumption has been weak and destocking has been slow. In the first half of 2015, domestic raw milk output grew by about 6%, domestic dairy companies purchased surplus raw milk for spray-drying into powder, and the volume of imported milk powder fell sharply. According to customs statistics, from January to June 2015, China's milk powder imports were 344,000 tonnes, down 49.52% year-on-year. In addition, Russia, as a major dairy-importing country, began in August 2014 to stop importing dairy products from sanctioned countries, and in 2015 this ban may be extended, which has also restrained international dairy demand to a certain extent.
Against the backdrop of a sluggish global economy, the decline in the exchange rates of the New Zealand dollar and the Australian dollar has intensified the slide in global milk prices. In recent months, affected by factors such as the plunge in international iron ore prices, the Australian economy has continued to be weak, and the Australian dollar and New Zealand dollar exchange rates have continued to fall. Because international dairy auction prices are settled in US dollars, the continued decline in the exchange rates of the Australian dollar and New Zealand dollar against the US dollar has intensified the extent of the decline in global dairy prices.
A raw milk price insurance mechanism should be established to cope with shocks from the international market
IFCN predicts that over the next 5 years international milk prices will enter a downward channel, meaning that China's dairy industry will face long-term competition from cheap international dairy products. In response, measures should be taken to ease the impact of falling international milk prices on the domestic dairy product market:
In the short term, it is suggested that domestic dairy supply and demand be stabilised through measures such as stimulating domestic demand for dairy product consumption, strengthening the labelling management of reconstituted milk, establishing a price risk linkage mechanism between dairy companies and dairy farmers, and launching a national milk powder purchasing and storage plan. First, actively publicise the nutritional value of pasteurised milk and yogurt, encourage the consumption of low-temperature milk, and secure space for domestic fresh milk demand. Second, through nutritional intervention measures, promote food consumption among special urban and rural populations and low-income groups, reduce processing and circulation costs, and expand consumption as feed for livestock and poultry such as piglet powder. Third, strictly implement the reconstituted milk labelling system, make the channels and uses of imported dairy products traceable, and reduce excessive corporate demand for imported milk powder at the source. Fourth, implement a national milk powder reserve plan, consider a “subsidy in place of storage” approach to give enterprises subsidy support, and ease corporate inventory pressure and the corresponding shortage of working capital.
In the long term, consideration should be given to using this round of dairy market fluctuation as a breakthrough point, adjusting and optimising the industrial structure, establishing a raw milk price insurance mechanism, “determining production by demand” to stabilise expectations in domestic and international markets, and making policy reserves for building a safety net for China's dairy industry. First, take raising the yield per unit as a breakthrough point to reduce production costs and improve industrial efficiency. Second, establish a raw milk price insurance mechanism, with the government subsidising premiums and insurance companies providing a backstop for raw milk price insurance, to help farms avoid market risks. Third, explore a risk-sharing mechanism between dairy companies and dairy farmers, with the government, dairy companies and dairy farmers jointly funding a milk price risk fund, and when milk price fluctuations are too large, activate the risk fund to subsidise dairy companies and dairy farmers. Fourth, do a good job of research on supply and demand in the domestic market, accurately judge the supply and demand gap for domestic dairy products, and stabilise expectations in domestic and international markets.