Welcome to The Dairy Mail

by Koos Coetzee

The International Farm Com­parison Network (IFCN) is a network of dairy scientists that work together to gain a better understanding of milk production worldwide. This is done through farm level comparisons in 45 countries and an analysis of the dairy industries in 85 countries. The International Farm Comparison Network’s (IFCN) 11th Dairy Conference took place in Kiel in northern Germany during June 2010.

A difficult year
The year 2009 can be defined as the worst year for dairy farming almost everywhere in the world. IFCN is currently comparing typical dairy farms from 45 countries. First results show that less than 45% of these farms can cover their full economic costs mainly because of very low milk prices. Compared with 2008, a substantial costs reduction in US$ was observed in most countries. These cost reductions were driven by lower input prices, currency devaluations to the US$, improvement of farmers efficiency and the short-term cost savings as farmers postponed capital expenditure during the economic crisis. Milk producers will not be able to produce milk sustainably at the cost levels achieved during 2009.

The fast recovery of the world milk price, which started in August 2009, has stabilised the situation somewhat.

Quick recovery
In contrast to last year’s conference, the latest conference took place at a time when world dairy prices had recovered from the 2009 levels. The speed of the recovery took dairy scientists by surprise. At the 10th conference, held in June 2009 in Sweden, the majority of scientists estimated that world prices would recover to US$30 per 100 kg milk (about R2,30 per litre) by March 2010. By September 2009, world prices already exceeded US$30 and has since increased to US$45.

The South African producer price also decreased from 2008, but not to the same extent as the world price. The recovery since has also been slower and less spectacular. International and South African producer price trends are shown in Figure 1.

Outlook to 2011
Supply and demand factors drive international dairy product prices from which producer prices are derived. On the supply side, the ratio between milk and feed prices has improved. The South African milk:feed price ratio has also improved since 2008 (Figure 2). However, the ratio did not improve for farmers who buy ready mixed concentrates. The demand for dairy products has improved since the recession of 2008/2009. Global GDP improved from -1% in 2009 to an estimated 4% for 2010.

World milk-production growth for 2009 is estimated at less than 1%, compared to 2%+ growth in the previous two years. World milk supply is estimated to grow by about 6 million tonnes and demand is estimated to grow by about 5 million tonnes milk equivalent in 2009. The IFCN estimates that world dairy stocks will increase in 2009 by between 1 and 2 million tonnes.

Based on the IFCN analysis of production cost in the different countries, it is clear that a producer price of below US$30 per 100 kg is not really sustainable. The consensus at the meeting was that a producer price of between US$35 and US$45 per 100 kg of milk is highly likely in future.

In time, higher world prices result in higher local prices. Current international product prices imply an import parity price, about 35 cents above the South African producer prices, which will have a positive effect. However, local conditions will still play a major role.