Northern and Southern Hemisphere milk prices are linked Volatility of global milk prices are a fact. In this, we see a strong connection between prices in the Northern and Southern Hemispheres. Nobody expected the current low milk prices one year ago.

Prins bram
Bram Prins

In my opinion, this is not primarily caused by a surplus of milk production, as the long-term trend has been and still shows a milk surplus of 1.5 to 2 percent annually. The milk supply graph does not show an anomaly in the year 2015.

The reason for the currently low milk prices is a lack of demand, specifically a shortage of purchasing power in Asia, Russia and the Middle East. This makes for a temporary surplus in commodities such as milk.

Around the whole world, 25 to 30 percent of farmers are now in trouble. This will have its consequences. So a fall in milk production is foreseen in the U.S., Brazil, Argentina and eastern parts of the EU and Russia. This will be partly due to producers switching to another sector, such as cash crops. If this does happen, the market could recover quickly.

What we learned at Canadian Dairy XPO

We participated in Canadian Dairy XPO and visited some farms in Canada in April. We spoke to a lot of different farmers and other companies in the dairy industry. I thought I knew how things work in Canada, but au contraire: I learned many new things during our stay there.

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Canada is well known for its well-functioning milk quota system. Other farmers in the world would like to copy this model and apply it to their own situation. This is nearly impossible due to the fact that Canada does not export many milk products.

Canada is a kind of “closed” dairy market. This cannot be realized in the EU, U.S., Australia and New Zealand.

So far, Canadian farmers have an excellent relationship with Canadian consumers and the Canadian government. The influence of the Canadian agriculture sector is shrinking due to fewer and fewer farmers in business. During the expo, we heard this line several times. Globalization is not passing up Canadian farmers either.

Milk prices in Canada are decreasing by 10 percent with maybe more to come.

At the farm level, it looks like the Canadian dairy sector is a booming business. However, on our visits we saw a lot of farms for sale and farms with liquidity problems too. In most cases, it is behavior of the farmers that got the farms in trouble.

Many farmers are used to buying new machinery without organizing the financing in advance. Banks worldwide have been forced to lend money under stricter rules. Blank checks are not possible anymore.

In Canada, suppliers know farmers can easily pay for new equipment, and they make use of this knowledge. For example, prices of equipment in Canada are at least 30 percent higher than in the EU. This creates, of course, a rise in prices because they know this cost of milk production can be related to the expected supply-controlled milk price.

However, when the milk price shrinks by 10 percent, the costs of milk production are not immediately reduced. Farmers say they are not able to reduce their costs and blame dealers for overcharging and consumers for not paying enough for dairy products.

What I see around the world is: Farmers who have good liquidity act proactively during volatility. This is a solution to volatility, but it has its limits. For me, looking to global cost prices, most of the time there are possibilities.

For example, I see farmers who try to mirror their operations to match the top 25 percent of farmers in their region, or they create their own discussion group to talk about managing volatility. I notice that farmers who handle the lowest milk prices often have lower production costs than farmers with “good” milk prices.

For example, I’ve seen this in my own country. In the Netherlands, the difference in local milk prices and world prices have been more than 10 percent lower for several years. How have we dealt with this? On our farm, we put our energy into restricting our costs. We have excellent liquidity planning and very strict budgets.

For example, during the first cutting of our forages, our 5-year-old rake crashed yesterday. The easiest thing to do would be to get a new one with a lease. However, this option does not fit our budget for machinery this year. As a consequence, we sent it for repair so we can still use it this season.

Furthermore, we have a sign at the office entrance saying “No bills today,” or in the U.S. this might be interpreted as “No solicitations today.” This makes clear to our suppliers that we are spending money only where necessary.

If they want to sell something to us, a supplier must be aware that only a win-win situation will work.

In summary, only farmers with a good vision of the future and ones who use consistent liquidity planning will have a positive future.  PD

Bram Prins and his family run a 300-cow dairy farm in the Netherlands. He takes care of the dairy’s management and strategic decision-making. He is one of four principal operators of Global Dairy Farmers. Visit Global Dairy Farmers to learn more about this organization.

Bram Prins