Volatility in the dairy sector: a brief introduction

Kevin Bellamy

Rabobank

EconomicsEconomic sustainability in a volatile price environment: the outsider experience

It’s been a decade of ups-and-downs!Price volatility -

variation in prices over time - is not unique to

the dairy sector…

All agricultural commodities

experienced more volatility from 2007

Milk – Meat – Oilseeds - Cereals

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Trading range of skimmed milk powder (US$/tonne)

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Annual trading range of butter (US$/tonne)

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The causes are complex…

The cause is not altogether clear: • Credit bubble • Market speculation

(commodities and futures)• Regulatory changes• Emerging market performance• Explosion of bio-fuels • $ exchange rate• Weather (climate) • Trends in food demand

Or maybe just….. inability of markets to adjust to change in all of the above

In dairy there are good reasons…

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USD/barrel

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USD/T

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USD:EUR

FUEL PRICES EXCHANGE RATES

FERTILIZER PRICESSOYA BEAN PRICES

Relatively in-elastic supply is impacted by the effect of inherently volatile input costs

It should be a good thing....

In a market economy we need price fluctuation to communicate what quantity of a product is required

But milk price is a poor communicator....Dutch production v Farmgate price

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Farmgate price

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(000 tonnes)

Milk production (000 tonnes) Farmgate price (€ per 100kg)

12 per. Mov. Avg. (Milk production (000 tonnes))

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% variation from average

We need to be careful with the data ....

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Frequency

% variation from average

2014

2011Example in the Netherlands 2011 and 2014 farm gate prices had very similar average milk prices:

• 2011 = €34.84/100kg

• 2014 = €34.81/100k

However, the spread of prices was very different…

Of course ..we are not ‘out of control’

US Margin ProtectionEU Intervention Buying Canadian Supply ManagementNZ / AUS Tax based savings

And ... help is available

So why is so difficult ?....Even after nearly 10 years we are still learning to cope…

So, today lets take take our learning a step further …by looking at how the more experienced sectors cope:

Volatility, friend or foe? Lessons from the oil industryIan Palliser, PAZO Consulting Limited, New Zealand

Volatility: the agricultural commodity sector perspectiveChristian Tylinski, Cargill Europe, Switzerland