While global dairy markets have recovered somewhat in recent weeks, currency tailwinds are boosting milk prices here by up to 5c/litre.

With quotas lifted and with modest demand growth in Europe, the 50% extra volume expected in Ireland by 2020 will end up being sold on the global market. Currently, almost 50% of Irish dairy products are sold outside the euro and sterling zones. This is five times the EU average. As the global dairy market is usually traded in dollars, the exchange rate has a significant bearing on the local milk price.

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The disparity in growth rates and central bank policies has caused the US dollar to strengthen against most major currencies. In August last year, the euro traded at $1.33. It fell to hit a 12-year low of $1.06 in March. It has since recovered somewhat and is trading 16% back on last year at $1.12. The 15-year average is $1.22.

Geopolitical issues

This is due to factors including softening economic growth and geopolitical issues including those in Russia-Ukraine and Greece and the announcement of the European quantitative easing programme.

Much of the focus has been on increasing global milk supply and slowing global demand. EU milk supply is up 2.8% since the lifting of milk quotas. In the US, supplies are up 1.1% year on year. NZ farmers are expected to produce less milk this season. Demand is waning in China, the world’s largest dairy importer, due to slower than predicted economic growth.

Farmers need to be aware that the current milk price in Ireland is on average 25c, and that this is being boosted by up to 5c/l due to currency. If global supply remains at current levels and demand continues, even the slightest change in currency could have a significant effect on the farmgate milk price. For example, if the dollar were to weaken by as little as 5%, ie to $1.17, it could reduce the farmgate price here by close to 2c/l.

As shown in the graphs, the GDT prices for all dairy commodities are back over the past 12 months. Butter has fallen 18%, WMP 42% and Skim 57%. If a European processor was selling butter on the global market last year it would have received a price of €2,106/t. Today the price is €2,066/t, a difference of only €40. This is because of the strong dollar.

The real market loss is €382/t year on year when no currency fluctuation is taken into account (ie constant currency). Similarly the real market depreciation of WMP is €853/tonne with currency boosting prices for European sellers by €237/t. SMP has seen the greatest falls in the market, down €1,387/t with currency offsetting €211 of this.

Theorizing the effect on milk price locally for a strong dollar is far different than determining its exact impact. The decline in US competitiveness last year was primarily driven by depressed EU milk powder and butter prices brought on by rising EU inventories caused by the Russian dairy embargo. US suppliers were pressed to price competitively regardless of the exchange rate. Therefore the dollar price does weaken if Europe is more competitive.

A weaker dollar helps major dairy importers, such as Nigeria by keeping dairy products more affordable for consumers. But Africa’s largest oil exporter has seen its currency weaken 23% against the dollar over the past year making dairy products more expensive for consumers.

This goes to show that factors outside the control of Ireland, dairy processors and dairy farmers, will determine the price of milk in the coming months and an economic policy change could serve as a gentle reminder that very little is in the control of the farmer.