Global milk supply insights for post-quotas UK market

The EU is abolishing milk quotas from April, but what is the state of play in other parts of the world? Rhian Price and Charlie Taverner investigate.

New Zealand

In New Zealand the only thing holding back milk production is the weather, says George Moss, who milks 335 cows across two units in Tokoroa, in partnership with his wife Sharon.

He is a member of Fonterra, the country’s biggest farmer co-operative, which is responsible for about 90% of New Zealand’s milk supply.

Fonterra’s milk price is worked out using commodity prices on the GDT auction before deducting costs.

The farm is currently experiencing its third successive drought and as a result Mr Moss has been forced to reduce the stocking rate on one farm and convert his organic herd back to conventional.

“We reduced our stocking rate from 185 cows to 165 with a view to reducing the amount of feed we are purchasing and becoming more self-sufficient.

“The other farm is no longer organic after six years. We found the dry conditions too hard to manage.” A 20c/litre (9.8p/litre) drop in milk price has been a further blow.

“Last year the milk price was really good at 70c/litre [34p/litre]. This year it has fallen to 40c/litre [19.5p/litre] as a result of the extra milk globally.”

Mr Moss says the only slight limitation on a NZ dairy farmer supplying Fonterra is they must have their three-year rolling milk production average backed by shares.

“If I want to increase my production beyond my three-year rolling average there’s a requirement for me to purchase extra shares.

“But we can purchase those about six months after the milk has been produced and they pay a dividend.”

In NZ there are no supply management controls to restrict production, nationally or at a processor level.

“Fonterra is obliged to take all the shareholder’s milk we supply; it is one of the core co-operative principles.

“If farmers can produce extra milk and get a margin they will do it, but at the moment production is being dictated by climatic conditions.”

Mr Moss believes the system in New Zealand works well.

“I think we have it right for NZ. The Canadians are producing milk principally for the domestic market. We are producing milk for export –about 90% of our milk is exported.

“Our strategy is to keep the cost of production low and maintain competiveness against other countries.”

He believes if restrictions were introduced it would push up the cost of milk production and reduce their competiveness globally.

“At the end of the day milk is a commodity and those that will stay in the business will be those producing the very best-quality milk for the lowest cost.”

He says there is power in numbers and that is why Fonterra has such a big role to play in the NZ dairy industry.

“If we stay united it will give us more clout. It is the only way we can influence the market. Farmers who are united invariably have better economic outcomes.

“In England, farmers appear to have become fragmented and their margins are being squeezed by supermarkets.

“[Fonterra brings] massive benefits to NZ farmers. It is the benchmark [for price] as it endeavours to drive the milk price up as high as possible.”

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Netherlands

Many Dutch farmers are cautious about expanding cow numbers, with strict fines imposed for overproduction.

At the moment Dutch farmers face penalties of €27/kg (£19/kg) if they exceed production. With current milk prices averaging 30c/litre (22p/litre), it is not a risk worth taking, says For Farmers technical manager Wim Hessels.

“Farmers don’t want to risk penalties because it is too expensive.”

He concedes some farmers are taking the risk and expanding numbers drastically, but the general trend is to get better, not bigger. This is being driven by the fact many farmers in the country are restricted from expanding.

While market regulations are currently halting expansion in the Netherlands, come 1 April other factors will prevent many Dutch farmers from increasing production, he predicts.

“Growing is something farmers want to do, but they are limited by different factors.

“Milk factories would take the extra milk. But we have phosphate limitations, so you must have plenty of land or get rid of manure via a manure factory. The quota we will have from 1 April is a phosphate quota.”

On top of this, he says, banks are unwilling to lend money unless farmers are able to prove they’re running good businesses and land is limited.

“We’re a small country and we don’t have much land. In some parts of the Netherlands, the land price is €50,000-90,000/ha (£36,000-65,000). It is impossible to start a farm from scratch.”

Instead Dutch farmers are turning to streamlining production.

“The focus is more on optimisation and increasing milk production by concentrating on youngstock management and the transition period.”

Mr Hessels says many farmers are nervous about what the future holds come next month.

“Quota was very expensive and it limited production, but we were used to it and everyone was clear about how much they had.”

Quota five to six years ago cost €2/kg (£1.46/kg), but now the value is €0.

“Now farmers don’t know what is going to happen and they feel a little insecure.”

While quota abolition will allow farmers to grow their businesses, he says it will also bring about price uncertainties.

“We do expect a more volatile milk price in the future.”

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Canada

In Canada hefty quotas as high as CAD44,000 (£23,000) prevent overproduction of milk.

While the quotas make it near enough impossible to expand or start up in dairying unless you have adequate capital, it does mean dairy farmers aren’t faced with volatile prices.

Logan Chalack milks 50 cows north of Calgary, Alberta, where quota is among the most expensive in the country, second only to British Columbia.

Mr Chalack has just spent $1.5m (£780,000) investing in an additional 40kg of quota at $38,000 (£19,750) each so he can milk 25 extra cows.

“We are building a new free-stall robot barn for 60 cows,” explains Mr Chalack.

The remaining 15 show cows will be kept in the tie-stall barn and milked on a machine.

Because of quotas, Mr Chalack says the milk price is relatively stable at 80c/litre (41.6p/litre).

“It is still a good lot of debt, but we are guaranteed our milk price every month. So we can plan to pay our debt.”

Farmers who produce in excess of their quota do not receive payments in some provinces.

Milk producers can, however, lease quota if they think they are going to go over production. As they won’t get up to full capacity until July this is something the Chalacks are taking advantage of.

“Right now we’re leasing the quota. We are almost making more money leasing it out than milking the cows.”

Mr Chalack says he wouldn’t change the Canadian quota system.

“We’re happy with the quota. It is not possible in Canada to milk 15,000 cows like in America. But larger producers make a lot of money when the milk price is strong, but lose money when things are bad.

“We produce some of the highest-quality milk in the world and having the quota system allows us to do that because we don’t get too big and we receive one of the highest prices for our milk.”

Although it isn’t difficult for established producers such as the Chalacks to expand, the quota system makes it almost impossible for new entrants to start up in dairying. But there are government-led schemes to help new starters establish a farm, such as the Alberta New Assistance Programme.

The government will match quota by loaning a small amount of the province’s dairy production quota, up to a maximum of 15kg/day, which is slowly reduced over eight years.

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United States

California is the largest milk-producing state in the US, accounting for 21% of total production. The state has its own pricing system and uses quotas. But it does not limit production like Europe.

Neil and Jessica McIsaac milk 350 Holsteins in Petaluma, northern California, producing organic milk for Clover Stornetta.

They produce 21,000lbs (9,500 litres) of milk a cow a year and have quota for 3,000lbs (1,360 litres) of organic production and Californian quota for 1,750lbs (790 litres) of solids. Quota costs roughly US$500 (£324) for every pound of solids. But it acts like a long-term investment, explains Mrs McIsaac, with producers receiving $1.70 (£1.14) back in their milk cheque for each pound of solids they produce.

Although Californian farmers don’t have to have 100% quota, Mrs McIsaac believes tighter restrictions on milk production would give milk producers a more level price.

“The California price swings up and down. There’s so much variation. A lot of people are pushing to do away with the California price and go to the federal system.

“When you have no base, people produce way too much milk and your country will have that problem [post quota].”

The McIsaacs chose to become organic for a higher and more stable price. They currently receive $37/100lbs (53p/litre) milk – the highest it has ever been.

Despite having quotas, this doesn’t restrict growth, as the Californian Pool (see “Farming in the US” above) is required to pick up all of the milk produced on farm.

“If we wanted to expand, our organic milk buyer would take the milk, because there’s a very big shortage of organic milk and demand is high.”

But with 255ha, the maximum the farm could hold is about 400 head, she says, which is partly why they chose to become organic to get a premium.

Another big factor limiting production is organic feed quality and supply. The family relies on feed imports from South America and China, which can also be sporadic due to problems with the ports or railroads.

“Earlier this month we went for two weeks without any protein and production fell by close to 1gal/day [3.7 litres]. We went back up about one-quarter, but not all the way.”

But other Californian dairymen have expanded, she says.

“When the price is high, dairymen just keep adding more cows and it drives the price down because there’s too much milk.”

Mrs McIsaac is unwilling, like many Californian dairymen, to give up quota, which is not surprising, as it is valued at £1bn statewide.

“It is something my family has invested heavily in, so we have a higher pay check every month. If they remove it we would lose that money.”

She believes the milk price wouldn’t be as volatile if quotas were more heavily regulated.

“I think there are advantages to limiting what people can produce. In Canada it seems as if the farmers can be more profitable.”