Page 4 - CellCheck Newsletter February #5 2015
P. 4
CELLCHECK NEWSLETTER
Guest Contributor
Mark Faherty, Economist, Irish Dairy Board
Managing price volatlity in dairy markets
VOLATILITY, the rise and fall of prices, is a normal feature of most free markets. It arises because
supply and demand for a given product can never be perfectly matched; at some tmes, supply can
be in surplus relatve to demand, and prices fall, and at others supply can be in defcit, and prices rise.
Volatlity is a relatvely new phenomenon in dairy markets, because for many years, these markets
were heavily regulated, limitng price movements and internatonal trade in dairy products was not
as signifcant as it is now.
Even though managing volatlity can be dauntng, we must remember that as a dairy trading naton
(Ireland exports 85% of its dairy output) the benefts of a freer and therefore more volatle market
outweigh those of a closed and heavily regulated one.
Recently, we have seen very sharp falls in the price of dairy commodites on internatonal markets, and
consequent reductons in the prices which can be paid for milk at the farm gate. Prices are currently
at lows not seen since 2012, afer having spent much of 2013 and early 2014 at near record highs.
Supply and demand explains these movements. Back in 2012, milk output was constrained by bad
weather around the world. Demand growth, especially from China, outstripped supply, and prices
rose. The strong prices encouraged extra output, and this extra output was facilitated by excellent
weather conditons and relatvely low feed prices through 2013. The result was a surge in supply, just
as demand growth was beginning to fall back. Product became plentful on the market, stocks built
and prices fell.
With the very low prices currently being experienced, output around the world will reduce, and
demand will increase as consumers see the extra value available to them. In tme, these moves will
bring about a ‘re-balancing’ of supply and demand, and prices will trend back up to their longer-term
average levels, once surplus stocks have been used up.
PAGE 4
Guest Contributor
Mark Faherty, Economist, Irish Dairy Board
Managing price volatlity in dairy markets
VOLATILITY, the rise and fall of prices, is a normal feature of most free markets. It arises because
supply and demand for a given product can never be perfectly matched; at some tmes, supply can
be in surplus relatve to demand, and prices fall, and at others supply can be in defcit, and prices rise.
Volatlity is a relatvely new phenomenon in dairy markets, because for many years, these markets
were heavily regulated, limitng price movements and internatonal trade in dairy products was not
as signifcant as it is now.
Even though managing volatlity can be dauntng, we must remember that as a dairy trading naton
(Ireland exports 85% of its dairy output) the benefts of a freer and therefore more volatle market
outweigh those of a closed and heavily regulated one.
Recently, we have seen very sharp falls in the price of dairy commodites on internatonal markets, and
consequent reductons in the prices which can be paid for milk at the farm gate. Prices are currently
at lows not seen since 2012, afer having spent much of 2013 and early 2014 at near record highs.
Supply and demand explains these movements. Back in 2012, milk output was constrained by bad
weather around the world. Demand growth, especially from China, outstripped supply, and prices
rose. The strong prices encouraged extra output, and this extra output was facilitated by excellent
weather conditons and relatvely low feed prices through 2013. The result was a surge in supply, just
as demand growth was beginning to fall back. Product became plentful on the market, stocks built
and prices fell.
With the very low prices currently being experienced, output around the world will reduce, and
demand will increase as consumers see the extra value available to them. In tme, these moves will
bring about a ‘re-balancing’ of supply and demand, and prices will trend back up to their longer-term
average levels, once surplus stocks have been used up.
PAGE 4
