December 23, 2016

Production Contracts in World’s Largest Dairy Exporting Regions

 |  By: Fran Howard

As 2017 approaches, milk production in the world’s two largest dairy exporters—New Zealand and Europe—is substantially slowing. At the same time, U.S. milk production is expected to remain strong, which should continue to place U.S. dairy products in an advantageous position globally.

New Zealand dairy producers are still reeling from last season’s (2015-16) losses. According to a recent USDA Foreign Agricultural Services report, fiscal-year losses for the average New Zealand dairy herd are estimated at $143,000.

“New Zealand dairy producers suffered their worst financial losses since the 2002-03 season,” says Sarina Sharp, agricultural economist with the Daily Dairy Report.

However, pay prices for the 2016-17 season are expected to rise 22% from the previous year, leading USDA staff in New Zealand to project that most farms will breakeven or post a slim profit in the current milk production season.

“Heavy losses have already taken their toll in New Zealand, as evidenced by the 2.9% year-over-year deficit in season-to-date milk solids production,” says Sharp. “Gray skies and cool temperatures reduced pasture output in September and October on the North Island, but dairy producers lacked either the funds or the incentive to spend on supplemental feeds.”

The USDA report shows that the New Zealand dairy herd declined by 2% from 2015’s 5.06 million cows to 4.95 million head. USDA expects the herd to stabilize at 4.9 million head next year, down 1% from 2016 levels. Despite better pay prices, milk production in New Zealand is expected to drop to 21.2 million metric tons in calendar year 2017, down 0.6% from 2016.

“Although the herd will be smaller, it will be more productive,” notes Sharp. “Dairy producers have culled their worst performing cows and will be better equipped in 2017 to supplement with feed as necessary.”

EU output continues to contract

“October marked the fifth consecutive year-over-year decline in EU milk output and the largest monthly European milk production deficit in decades,” says Sharp.

Preliminary figures from the European Commission show milk production in October dropped roughly 957 million pounds below year-ago levels to less than 26.5 billion pounds.

“October was the first month in which the European Commission’s Milk Production Reduction Scheme was in effect,” notes Sharp. “The scheme pays enrolled producers a sizeable premium for producing less milk than they did a year ago. Sustained financial losses and the promise of a bonus have clearly incentivized producers to curtail production.”

Year-over-year October production plunged 3.7% in Germany, the biggest drop since June 2008. Collections sank 7.7% in France and 6.1% in the United Kingdom. The Netherlands reported steady output in November after posting a 2.2% year-over-year increase in October.

“Combined, Europe and Oceania produced 1.6 billion pounds less milk in October than the year before. The shortfall from the past few months was large enough to erase the sizeable surplus from the first half of the year,” says Sharp.