Early warning indicators point to a delayed Covid-19 milk price crisis, warned the IFCN dairy research network last week.
IFCN founder and CEO Dr Torsten Hemme told the Alltech ONE Virtual Experience that a Covid-19 recession, and Russia becoming self-sufficient for dairy, will drive down prices.
He said the single biggest impact from the crisis will occur if the world enters a major Covid-19 recession.
The recession effect has not yet fully hit the market, but Covid-19 and lower oil prices mean lower incomes, and lower milk demand, said the boss of the network of researchers from more than 100 countries, which has 20 employees at their HQ in Germany, where they have studied dairy markets for the past 20 years.
Hemme also explained the likely effect of Russia moving from being the second largest importer of dairy products, towards self-sufficiency, which IFCN has predicted in 2020.
“What will Belarus do with most of their dairy exports, which are not going to Russia anymore? This is a key question,” he asked. “This milk and these products will be very cheap, offered on the world market, and will flood the world market with cheap products.
Looking further ahead, he said the biggest driver to get out of a milk price crisis is probably that milk supply drops due to lower milk prices. “And then you are through the downward cycle. And the more we are undershooting the normal average price, the stronger we will later on overshoot the price.”
“What worries me at the moment most is the closing of slaughterhouses, which is probably keeping more cows alive, which have been usually culled, which means we have more milk supply than normal,” he told the 2020 virtual version of the annual Alltech One conference, which drew an audience of more than 23,000, representing 118 countries.
Hemme predicted liquidation in the global dairy cow herd of about 1%.
He said future markets for butter and powder predict a milk price for the rest of the year in Europe of $29 (€26.60) per 100kg.
IFCN predicts a U-shape recovery (because the milk supply will remain strong in 2020, while demand growth is impacted).
“We think that a price roller coaster for a three-year period is quite likely,” warned Hemme. This prediction includes a U-shaped recovery in 2021, and higher prices in 2022.
But recovery could begin in the last quarter of this year, and the milk price crisis could be over by the middle of 2021.
He said IFCN warned in 2009 that “We will probably have two to three global crises every 10 years.”
That followed world market farmgate milk prices from 2000 to 2006 averaging $25, then almost 10 years averaging $40, and a price level in the past couple of years at $35 (Hemme said the main reasons for the price fall from $40 to $30 are strengthening of the US dollar, and weakening of feed prices).
“We had a kind of a roller coaster from 2007 to 2010, with tremendous price highs and lows. And we had a similar crisis, 2013 to 2016. And a crisis means, we have very high prices and very low prices. In times with very low prices, the party which is hit most are the dairy farmers.”
The next hardest hit are farm inputs suppliers, because their customers are in crisis. “Number three are processors, because sometimes, their margins shrink. And the same happens to retailers. “
“Dairy farmers, so far, carry most of the load.”
He said feed prices are now slightly lower than 2019, having followed oil prices down.
“Oil price is a key driver for everything.”
“The oil price drives feed price, and feed price and oil price drive milk prices. It’s just a matter of a delay.”