From North America to New Zealand to Ireland and Malaysia, an unexpected surplus in the dairy market has created dilemmas for suppliers, farmers and buyers. Milk production in the EU is up approximately 2% in 2018 increasing pressure on export markets. This oversupply stems from a number of factors depending on what part of the world is being described.
While some of the larger multinational firms have levers in place to withstand a sustained pause in the market, smaller farming organisations do not have the benefit of riding out the market and in some instances are being forced to sell.
“We just aren’t getting paid enough for our milk. It’s supply and demand.”
Nate Elzinga, Michigan Dairy Farmer
There are a multitude of factors which have resulted in this oversupply, a few key ones of which are outlined below.
In Europe overproduction has been on the radar since 2014 when the EU lifted domestic caps on dairy production. Although the EU subsequently reintroduced these caps (2016) the controls are voluntary and it doesn’t seem to be having a massive impact in terms of curbing production. Some subsidies have been put in place to help subsidise these voluntary cuts and these are making some inroads, but it’s uncertain how long there will be an appetite to continue to pay milk producers for not producing milk.
On the flip side, government subsidies in some countries provide cover for food sovereignty (e.g. the Canadian dairy supply management system) by helping to prop up local industries, ensuring a steady local supply. This may not create an oversupply locally but impacts the parties attempting to import their products.
Trade policy is having secondary impacts across dairy markets as well. Until negotiations around NAFTA, TPP and Brexit are completed, their full reverberations will not be understood. This has made many buyers jittery and ensured they stay sidelined in the short run, which in turn, concentrates even more supply with the producers.
Global trends towards nationalism are widespread with protectionist governments winning recent elections in Italy and Hungary, while similar movements made gains in Germany, Austria, Sweden and France. These results in and of themselves don’t enable dairy surpluses, but they complicate the position of these countries on existing free trade agreements which, in the short term at least, will potentially cause buyers to take a wait and see approach.
Agri-Research and Technology
Technological advances has meant that most dairy producers can now produce more product in a shorter timeframe using a smaller geographical footprint. Some of these changes in farm management are just the natural result of supply chain and information technology efficiencies, but specific improvements in dairy production have also boosted supply.
On most modernised farming operations, the milk production per cow has increased. Meaning smaller herds are producing more product than ever before. An Understanding Dairy Markets from 2016 study details how annual milk production in Wisconsin has gone from 18,824 pounds per cow in 2006 to 23,552 per cow in 2016. An increase of roughly 25%. This basically ensures that we are overproducing previous estimates just through more streamlined farming practices.
A Shift Towards Alternatives
On many fronts, dairy is losing the branding and perception war. Animal welfare and environmental concerns have plagued the industry for years. While these concerns are being addressed (to varying degrees of success) in many regions, it doesn’t alter the fact there is a decent sized (and growing) portion of the population that would be happy to switch to dairy alternatives. The younger demographic of the world population is increasingly becoming vegan and this, along with a rise in young people who identify themselves as dairy intolerant, is making future prospects in traditional markets look unstable.
Dairy alternatives are nothing new, but they are growing in popularity and market share. Although this is somewhat offset by the expansion of dairy into new markets (China, India), it does create surplus in that existing segments of the market which may be shrinking.
Supply and demand in dairy is naturally going to have its ups and down, so there is bound to be a correction at some point, but in the immediate future, it appears that most dairy markets may stay subdued for some time.
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