Ukraine war impacts world dairy markets
An invasion of Ukraine by military forces of the Russian Federation will see, in the short term (up to at least the end of Q2 2022), global raw milk prices increase even faster than we’ve seen in recent times, according to Kite Consulting’s client update on the impact of the war on dairy prices.
At present, the global dairy markets have not yet fully factored in the implication of such an invasion, so despite the current high dairy price levels, a further increase is possible. Ukraine and Belarus are net suppliers of dairy products to the global marketplace, while Russia is a net importer.
‘Panic buying’ in the global dairy market, resulting from an overnight loss of Ukrainian and Belorussian exports, may trigger further price increases, even when only moderate volumes are being traded. In the UK, farmer pressure on the UK processors to keep pace with global raw milk price increases is likely to build.
Despite ever higher milk prices, farm milk production may not respond, or may even contract, as energy prices rises lead to on-farm cost-of-production increases that may outpace milk returns, certainly in the short-term. Farm output growth that could somewhat dampen dairy price increases is, therefore, unlikely to happen in the short term.
UK dairy processors will face the effects of higher energy prices on their milk purchasing costs, their own operating costs, and on consumer buying power. A further increase of energy prices will drive up consumer inflation even further, hitting consumer buying power. Consumers are already clearly feeling food price inflation and retailers know this. This may impact on demand, and so UK retailers are likely to be highly resistant to further dairy price increases.
As a result, selling to global dairy commodity markets will potentially become even more attractive to those processors that have that option. Evidence of selling options in foreign commodity markets may be needed for UK retailers to be willing to accept further price increases from processors, which will be required to maintain UK milk supply if farmers are under further cost of production pressure.
Should this situation escalate, it will be important that UK dairy processors are able to increase sales prices even faster than they have been in recent months, to enable them to cover their own additional cost inflation and to be able to pass on higher income through milk price to farmers to cover further on-farm cost increases.
As a result, inflation of consumer dairy prices in the UK seems an inevitable consequence of conflict between Russia and Ukraine, due to the arising impact on global dairy markets.
For further information ,visit: www.kiteconsulting.com