Analyst urges calm amid disquiet over declines in global dairy prices

Farmers should not read too much negativity into recent declines in global dairy prices, according to analysis by Davy Stockbrokers.

In an equity briefing issued yesterday, Davy analyst John O’Reilly said that recent price declines can be largely explained by short-term oversupply, itself a product of a sustained spell of good weather.

He also noted the month-on-month price dips are in marked contrast with the annual figures. When viewed over a decade, the prices being enjoyed by food producers suggest an even more favourable pattern.

The recent disquiet among farmers in relation to price follows reductions in prices paid at recent auctions for New Zealand co-op Fonterra, reductions in the butter price being paid by the Irish Dairy Board, and a monthly dip in some prices in the index of the Food and Agriculture Organisation of the UN.

“The decline in dairy product prices in the FAO index is consistent with the outcome of other measures such as the fortnightly Fonterra auction result,” said Mr O’Reilly. “The decline is supply-side driven and reflects stronger than normal growth in Oceania and in northern hemisphere production. Favourable weather conditions are a key factor in this.

“For this reason, the recent price fall is not structural. Monthly index price changes lack perspective. What should be noted is that the overall index today stands at 2.4 times its level of a decade ago and that only once over the course of this period [2009] did the value of the overall index record a significant annual decline.

“In eight of the past 10 years, average annual prices rose year-on-year. Comm-odity food prices look set to remain elevated compared with their level during most of the past half century.”

Of the five product groupings that comprise the FAO’s food price index, dairy has been weakest. In March, dairy product prices fell by 2.5% month-on-month.

The overall index was unchanged in March, with a rise in food oil prices offsetting the decline in dairy product prices.

Year-on-year, the overall index was 6.9% lower. Meat prices rose modestly, while cereal prices were also slightly ahead.