7 reasons why the milk price will increase in 2012/13

1. The drought and stifling heat currently hitting the Mid-West of the US is forecast to continue into October. This has major consequences for the global dairy industry:

• US dairy cow production is down
• The likelihood of a reduced 2013/14 grain harvest will put further pressure on the US dairy industry’s ability to feed itself
• A reduction in US production and exports of soya beans and corn will affect the Chinese dairy industry (and others), which relies heavily on these crops to feed its cows

2. The profitability of the US dairy industry, which has a big influence on the dairy supply outlook, is at its lowest for years.  The milk to feed price ratio has fallen to 1.24 – which means the industry is contracting and 80% of the milk cheque is being spent on feeding cows.  Normally, the ratio would need to be above 2.5 for industry growth.

3. Drought has hit production in other dairying countries, including South America and Ukraine. Adverse weather has also badly affected Russian wheat exports that are vital to the dairy industry.

4. Governments that might once have stepped in to help dairy farmers now have their own serious budgetary and financial constraints.

5. History. In four of the past six years the NZ Milk price rose by an average 40% on the initial estimate.  The figures are:

6. New Zealand dairy is very unlikely to increase production by 10% like we did last year.  If anything, an El Nino weather pattern will take effect, causing summer dry and static production.

7. The long-term growth in demand for milk products is inexorable.  It will result in price rises in real terms (albeit with some ups and downs)