David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Farmers have a potential advantage over producers of other commodities. Agricultural products are tied to the seasons and require heavy investment each year in terms of fertilizer, water, seed and feed. As a result, supply gluts have the potential to dissipate more quickly than elsewhere, and deficits can be longer lasting. Breeding a new herd of beef takes a lot more time than powering up a colliery.

After Capitulation, Recovery?
Fonterra's farmgate milk price forecast fell to a near-record low this month
Source: Fonterra,
Note: Forecast for year ended June. Only May, September, December and March forecasts included for sake of clarity. August 2015 forecast for 2016 (not shown) was record-low NZ$3.85/kg. Dotted lines indicate missing data.

That's good news for dairy farmers, if not for their cows. The industry has had a ``tough season,'' New Zealand's Fonterra, the world's largest dairy exporter, said in reporting first-half results Wednesday. Prices at its milk powder auctions touched a record low in August and the company expects to pay just NZ$3.90 ($2.64) a kilogram to farmers for their milk in the current season. New Zealand's farmers need about NZ$5.30 to break even and 80 percent of the industry is operating at a loss, the Reserve Bank of New Zealand said last week after conducting stress-tests of the nation's banks to measure their resilience to the dairy slump.

Dry Milk
New Zealand whole milk powder auction, average winning price
Source: Fonterra

There are already signs of supply adjustment. New Zealand's dairy herd shrank in the year ended June for the first time in a decade, with the 330,000-strong drop in cattle numbers attributed largely to culling. That shift of cows from milk production to abattoirs helped drive the price of beef from Australia and New Zealand to its lowest since 2010. 

Meanwhile, demand is looking healthy. The global dairy market will grow by 2.3 percent a year between 2014 and 2020, with traded products rising 5.5 percent annually and adding some 25 billion liters over the period, Fonterra said in a presentation today.

The U.S. Department of Agriculture estimates that a 300,000 metric ton stockpile of whole milk products in China at the start of 2015 has now declined to about 89,000 tons, helping to ease a glut that's weighed on the market. Consumer dairy prices in Asia's biggest economy are at last seeing some modest inflation after declining throughout last year.

China consumer price index, dairy products, % change on year
Source: Bloomberg data

That's already improving the performance of companies active in the region. Asia and Latin America overtook Europe to become Danone's largest market during 2015, the French maker of Activia yogurt said last month, with volumes up 2.8 percent and revenues rising 6.7 percent. Mengniu Dairy, China's second-biggest publicly-traded milk producer and a partner of Danone on chilled dairy and infant formula, saw margins in its liquid milk unit rise to a decade high in annual results for 2015 reported Tuesday:

Milk Fat
China Mengniu's profit margin on liquid milk and drinking yogurt sales is at its highest level in a decade
Source: Bloomberg data, company reports

There's reason to think that even Mengniu's weaker baby-milk segment, which drifted back to a 67 million yuan ($10 million) loss last year due to that mountain of powder from the likes of Fonterra, will soon see better prospects. China ended its one-child policy on January 1 and now allows all families to have two children. That should sharply increase demand, even if inertia and the costs of raising children stop it from mathematically doubling the market.

Asian dairy demand has certainly been hit over the past year, but underestimating it would be a mistake. Danone is currently trading at an enterprise value of about 12 times Ebitda, compared with 9.5 at Mengniu and 8.8 at Fonterra. Italy's Parmalat, which doesn't have any operations in the region, is on 8.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at