"Even when prices start easing back, we don't expect them to go back to where they were," said Hayley Moynihan, a dairy analyst at Rabobank in New Zealand. "The cost of production and ongoing demand is going to see prices eventually settle at higher levels than they did in the past."
After years of saving, Geoff Irwin finally scraped up enough money to buy his parents’ dairy farm near Hamilton, New Zealand, in 2003. Now his parents have retired to a house nearby and Irwin, 45, runs the farm with its 300 cows.
It is hard work, 12 hours a day, but already it looks as though it has paid off: Just four years later, the farm is worth more than twice what he paid for it. Prices for dairy farms in New Zealand are soaring along with dairy incomes, thanks to a global milk boom.
Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the past two years. In parts of the United States, milk is more expensive than gasoline. There are reports of cows being stolen on Wisconsin dairy farms.
Rising incomes, from China and India to Latin America and West Asia, are lifting millions of people out of poverty and into the middle class.
New Zealand is one of the world’s largest milk producers, according to IFCN Dairy Research Centre in Germany, but the largest exporter of dairy products.
Some dairy economists doubt the world’s heifers are up to the task, and say there is a possibility that the shortage of milk now being seen in parts of the world will spread.
Others say there are plenty of places where more milk can be produced if the price is right. One thing they agree on is that milk prices are likely to stay high and rise even higher.
This is not good if you are in the market for milk. Pizza parlours and ice cream vendors are raising their prices.
What is unusual, and somewhat confusing, about the milk boom compared with other booming commodities is that milk is not like oil: You can’t stick it in barrels and stockpile it.
It goes sour. Even in powder form, the most commoditised version, milk has a shelf life. As a result, only about 7 per cent of all the milk produced globally is traded across borders.
In the past, the world could always count on the US and Europe to fill shortages by exporting some of their subsidised stockpiles of cheese, butter and milk powder. But the US has drawn down its butter mountain and other stockpiles; the same is true of the European Union, which started cutting dairy subsidies in 1993 and will be finished this year.
Rising dairy demand in the US and among the EU’s new members, moreover, is sucking up supplies.
Australia, a major exporter, is suffering a multi-year drought that has devastated its milk production by killing off the grass that milk cows eat. Many in Australia worry that, far from being a temporary problem, the drought is the result of global warming and that dairies will never be the same.
At the same time, rising demand for biofuels is pushing up the price of corn and other grains, which is what farmers in the US, Europe, Canada and Japan use to feed their cows instead of grass. Production is growing in emerging markets like China, but demand there is growing even faster.
In other emerging markets, rising prices have prompted governments to step in to control prices. India, the world’s largest milk producer, this year banned exports of milk powder.
But still rising milk prices have not been an unmitigated boon for producers, not even in New Zealand. Payments to farmers are on track to rise another 24 per cent this year, putting an extra $76,000 into the average farmer’s pocket.
But rising exports, property prices and farm incomes have all contributed to rising inflation in New Zealand. New Zealand’s export boom has also created a labour shortage that is pushing up the cost of hiring farm hands.
Rising costs also hurt New Zealand’s ability to increase production in response to rising demand. The country’s sheep farmers, for example, are trying to convert to dairy, according to Peter Buckley, president of the Waikato Federated Farmers. Higher land costs are also making it more expensive to buy new pastures.
As a result, experts say the growing demand for milk will have to be met in countries like China and Argentina as higher prices trigger greater investment in lifting milk yields. India has announced plans to lift its ban on milk powder exports next month.
“Even when prices start easing back, we don’t expect them to go back to where they were,” said Hayley Moynihan, a dairy analyst at Rabobank in New Zealand. “The cost of production and ongoing demand is going to see prices eventually settle at higher levels than they did in the past.”
