Connecting farmgate milk prices to market value

Published 1 October 18

It should come as no surprise that New Zealand dairy farmers will be paid more for butterfat in 2018/19 than they will for protein. The implications in terms of feed and genetics are far-reaching, and the move should see New Zealand farmers ahead of the bunch when it comes to delivering what the market is demanding.

What is perhaps more surprising is the fact the rest of the world hasn’t done the same. Since the turn of the millennium, butter prices have been the driving force behind rising commodity markets. On average, butter has risen $200 per tonne per year since 2001. SMP, while being more volatile, has only risen by an average of $35 per tonne per year over the same period. In fact, with the current stock in intervention, SMP prices are currently lower than they were in 2001.

 World wholesale butter prices

 World wholesale SMP prices Sep18

As a result, globally, butter has been more valuable than SMP since the start of 2015, and certainly a long way away from the historic protein:fat ratio of 2:1 that is still engrained in most farmgate milk prices in Europe.

 World AMPE by component Sep18

This means across most of Europe dairy farmers continue to be encouraged to breed and feed for protein despite the market having moved on more than three years ago.

In the dairy sector, many of New Zealand’s innovations and ideas have been adopted by other leading milk producing nations over time.  It remains to be seen whether pricing mechanisms around the world follow the New Zealand lead, but if farmers are expected to be increasingly responsive to market demands, effective price signals should be part of the solution.