Europe cutting back milk production

According to Fonterra’s latest global dairy update, EU production in June fell 2% on the same month last year -- June being the first month since March 2015 that production has fallen vs the same period last year.

Fonterra says more culling, less supplementary feeding and poor weather contributed to the decrease.

The largest EU producers -- UK, France and Germany -- are down 7%, 3% and 1% respectively. Production for the 12 months to June is up 4% vs the same period in the previous year.

Last week Fonterra surprised everyone by raising its milk price by 50 cents to $5.25/kgMS; with forecast earnings per share now 50-60 cents, the total payout available to farmers will be $5.75-$5.85 before retentions.

Fonterra chairman John Wilson notes that since the co-op’s last review in August, global milk supply has kept falling and demand has remained stable.

“Milk production in key dairying regions globally is reducing in response to low milk prices. Milk production in the EU for 2016 is beginning to flatten out and our New Zealand milk collection is currently 3% lower than last season.”

ASB rural economist Nathan Penny says Fonterra is coming around to the bank’s view sooner than they expected. “Specifically, our view is that dairy markets have fundamentally shifted. In particular, farmers have changed behaviour in response to low milk prices by lowering production.”

Penny expects more production weakness to show this year.

“With that in mind, we expect prices to stabilise over the short term, before lifting again later in the season. As a result, we continue to expect a finalised milk price of $6.00/kgMS for 2016-17.”

US production in July increased 1% vs the same month last year. Milk production for the 12 months to July has increased 1% vs the same period the previous year. The US Department of Agriculture forecasts that milk production for 2016 will be 1.9% up on 2015.

Milk production in NZ for July was 1% up on the same month last year. NZ milk volumes are coming off the low point of the season; volumes will keep rising for several months.

Australian production in July -- the first month in the 2016-17 production season -- fell 10% vs the same month last year.

Fonterra says milk production in the current season has been hit hard by the cut in Australian milk prices to align with global dairy prices. Production for the 12 months to July is down 3% vs the same period the previous year.