In the recent 3 month we have seen a sharp shift of power from the buyers and processors to the producers of milk.
To understand this change in market psychology we have to take a closer look to the situation of demand and supply.
Globally the last year has been a very challenging to all producers of milk in total. Independent from the region nearly every single producer where close to a loss or losing money. For example in the U.S. per 10.000 dairy cows a producer if buying feed externally had a cash out of app. 1,5 Mio US $ in a month. This accumulated for 9 month he lost 13,5 Mio US $.
This situation lead to a shrinking production not only in US and Europe , where it is still moderate with – 5 % but also Argentina , Eastern Europe and Russia (minus 10 % to minus 15 %) and other markets. (see graph)
The world dairy consumption also shrank, but by only 3 – 5 %. Taking in consideration that the seasonal production fluctuation taking effect especially in October and November with a shrinking production in the northern hemisphere, here we saw a real existing shortage of raw milk.
Even with quite well filled stocks, the market psychology now changed fundamentally and all selling market participants waiting where the price is gone climb.
We saw in the major markets and USA , NZ and Europe a steep increase for products like milk powder which has skyrocketed a 50 % and butter app. 70 % in the last two month. (see graph below)
The market is very tight in supply so even with high prices it remains hard to purchase these commodities.
Nearing the price levels of August 08 there is a relief for all milk producers because they see rising prices for their product now.
But for getting supply back to production levels as in 07 and 08 it takes a change in expectations for the producers. They should believe that they can expect sustainable higher prices for their commodity so their investments pay off.
They participated all in the biggest seen price crash since the great depression, and very similar to a car driver that fell in an accident the will stay away from the steering wheel a while and will drive very carefully.
We will probably see a deleveraging of the producers, and with paying back credits and accumulating cash the seeds for a new investment round and expansion in production are laid.
But I personally doubt that this process will start in the near future, because the producers need safety in their future to make investments.
Only by this they will be willing to invest and get production up again.
This is the reason for bringing all producers together and insure that there will be no price jumps in the future as we saw in the last year. This is not only in the interest of milk producers but also dairy processors. They should get closer to each other and reduce the risk of market failure as we saw it because a market volatility to this extend is a very destructive force and the efforts of years may vanish in a very short time.