Earnings model is declining for dairy farmer

At the beginning of this year, the milk price remained remarkably stable during the corona crisis compared to other raw materials. However, since the spring, processors' milk prices have been rising, following developments on the Northwestern European dairy market. Rising milk prices were in any case desperately needed, because they followed in the wake of rising raw material prices for feed. However, the DCA dairy quotations have been at a more or less stable level in recent weeks.

In the corona crisis, many countries sold their raw material stocks last year to free up liquidity for corona support. These countries are now replenishing their supplies again. Add to this the rapidly growing pig herd in China, which increases the raw material requirement for feed, and this results in significant price increases on the raw material market. Which in turn has consequences for the Dutch compound feed price.

Concentrate prices
The price for a tonne of A-lump rose by more than 6% in 11,5 months. From €240,5 last October to 268,5 last April. This is mainly due to the high soy prices that are currently prevailing. While less than a year ago in July €296,6 was paid for a tonne of soya, this price was €456,15 last January. Even though the price of soya is now falling, it was still €378,90 in April and concentrate prices continue to rise.

De Boerenbusiness Compound feed price indicator shows that the price of A-brok is expected to rise further towards September after a short stable period this summer. After that, according to the indicator, feed prices appear to drop again. Coincidentally, but perhaps not, Rabobank expects the milk price to also peak in the third quarter of this year. 

Does a higher feed price also lead to a higher milk price?
Due to higher feed prices, dairy farmers may choose to feed less concentrates. This causes total milk production to decrease, which in turn causes the milk price to rise. But is that really so? When we look at the past, it appears that this is often not the case in the Netherlands. In general, the feed price only increases after the milk price has risen. For example, when we look at the rapid increase in the milk price in May 2007, we see that the feed price only moves up a few months later. Higher feed costs are therefore not an incentive to induce the dairy market to higher milk prices.

There is not much change on the supply side. In France, production increased by 0,2%, but in Germany, the United Kingdom and the Netherlands it fell slightly. In the United States and New Zealand, milk supplies have increased in recent months, which is one of the factors that puts some pressure on the quotes on the CME and NZX futures markets. The Global Dairy Trade in New Zealand has also recorded a modest negative trend for 1 times in a row.

Expectations
Because the milk supply is stable in Northwestern Europe, but slightly higher in the US and New Zealand, the positive incentives for rising milk prices are not numerous. It therefore appears that the milk price will end up at a stable level after the recent increases, but will not increase much further. Although milk prices have risen, given the higher feed costs, this does not mean that the returns of an average dairy farm also increase by such percentages. 

* With the cooperation of Niels van Vilsteren