Co-operatives may be losing their price-cutting excuse as GDT turns

Another round of milk price cuts from processors in recent days has come accompanied by spokespersons roundly blaming “global markets.”

Dairygold cut March prices to 40c/l, saying “milk returns remain under pressure in the short term”.

Kerry cut deeper, dropping to 38.1c/l, blaming a “significant downturn” in global dairy markets, saying commodity prices have reached levels that “cannot sustain current milk prices”.

Lakeland cut 4c to 40.81c/l with a spokesperson saying “global dairy markets continue to disimprove”.

Arrabawn also cut 4c to 42.08c/l for March, blaming weaker global dairy markets.

It is not hard to see a theme, and certainly there is no point in blaming the processors involved for the cuts they are making, if they really are so powerless in the face of global market prices.

It is probably best we take a look at global dairy markets to see what’s going on there.

The benchmark of publicly accessible data is the Global Dairy Trade (GDT) results, which, though not particularly applicable to Ireland for prices, do give an indication of which way the wind is blowing.

Of the eight GDT events held so far this year, only two have led to an increase in the GDT price index. Interestingly, one of those two was the event earlier this week on 18 April (Figure 1).

At least one of the co-op CEOs we’ve talked to in recent weeks specifically flagged the GDT price index dropping below 1,000 as a indicator of the weakness in the global market.

And while one swallow certainly doesn’t make a summer, we will keep a close eye on this over the next couple of auctions to see if the change in direction sticks.

It will be harder for producers to stick to their chorus of “global market conditions” for price cuts if global markets are actually rising.

In fairness to the dairy co-op CEOs we have talked to, they are also generally singing from a more positive hymn sheet for the second half of this year.

The logic runs something along the lines of: high prices in 2022 mean demand fell, with lower demand comes lower prices. Prices will continue to fall until supply drops enough that it is below total demand. At which point prices will start to rise again.

The timing of that inflection point is shrouded in uncertainty, but the best guess of people such as Dairygold CEO Conor Galvin, Lakeland CEO Colin Kelly, Tirlán CEO Jim Bergin and Ornua’s Bernard Condon is that it will come in the second half of this year.

To be clear, nobody is expecting a spike back to anything like the prices that existed in 2022, but a bounce off the lows is predicted followed by a return to the pre-pandemic market trend.

Speaking at the Bord Bia dairy markets seminar this week, market analyst Jasper Endlich broke down the global supply-demand picture and highlighted where the pressure is likely to come to bear. While production in the US and EU was relatively flat in 2022, it dropped more than 3% in both Latin America and New Zealand. China, meanwhile, continued its push to increase domestic production with an 8.5% increase on the back of a 10% expansion in 2021.

In much of Europe, current prices are at or close to loss-making levels

Areas that have increasingly stringent environmental requirements such as New Zealand and the EU will remain supply constrained, no matter what the price is.

In much of Europe, current prices are at or close to loss-making levels.

Ireland’s grass-based system does give advantages here as costs tend to be lower.

Latest data from the US shows the number of dairy cows starting to trend higher again after dropping below 9.4m at the end of 2022. Production from Latin America will be weather dependent again. China will continue its drive to increase domestic supplies.

It seems likely, therefore, that due to high regulation and high costs of production, Europe will likely see the largest drops in production this year.

This will probably work to the Irish farmer’s advantage as a rapid fall-off in supply in this region will probably bring demand back faster, making for a higher bottom in prices.

While there is plenty of doom and gloom in dairy markets, right now, Ireland’s milk suppliers are well positioned on two fronts over the longer term.

While many of us might be tired of hearing about “Ireland’s grass-based system” it is the thing that allows Irish processors to command a premium on global markets.

At this week’s dairy markets seminar, one Bord Bia presentation showed how animal welfare labelling in Germany is a four-tier system, with products from animals raised outdoors gaining the highest rating (and therefore able to command the highest price).

Similarly, the Origin Green programme gives an advantage as it helps large buyers in meeting their environment, social and governance (ESG) targets.

Seventy-two per cent of international buyers say it is important to have suppliers with strong sustainability credentials, according the Bord Bia. Those demands are being driven by consumers, with 75% globally making an effort to buy more sustainably produced food.

With Ireland in such a strong position from both an animal welfare and sustainability perspective, the country’s dairy products will continue to command a premium.

New markets will continue to open to those premium dairy products as populations and consumer wealth continues to rise, particularly in Asia.

As Bord Bia CEO Jim O’Toole said, “I believe that there are few as well positioned as the Irish dairy industry to benefit from the growing global demand for sustainable nutrition”.