In recent weeks, the Pacific Ocean’s temperature has been on the rise. So much so, weather forecasters have raised the likelihood of an El Niño event in early 2015 to a 65-75% chance; however, most forecasters expect any El Niño to be mild. El Niño is “unusually warm ocean temperatures in the Equatorial Pacific” according to the National Oceanic and Atmospheric Administration (NOAA). Historically, El Niño weather patterns tend to arrive at the end of the year with the full effects realized in the early part of the next year.
What is the connection between El Niño and dairy? El Niño disrupts normal trade wind pattern shifting rainfall away from the South Pacific to the eastern Pacific. That translates into Australia and New Zealand having very hot and dry summer months and California having a mild, but very wet winter – somewhat the weather patterns that are manifesting today. El Niño can also disrupt South America’s growing season by causing dry conditions that ultimately impacts forage quality, feed products and in some cases dairying. That said, the predictability of an El Niño and its impact on weather pattern can be challenging – especially if the forecast calls for a mild event.
In 2012, southern hemisphere countries represented approximately 37% of world dairy trade, in milk equivalent volumes according to the U.S. Dairy Export Council. Droughts in this region of the world are frequent – occurring every one to three years in New Zealand alone. Australia, New Zealand, Argentina, and Brazil are primarily pastoral based dairying systems; hot and dry conditions lead to poor pasture that in turn can adversely affect milk output per cow. In 2007 and again in 2013 New Zealand suffered widespread drought conditions – a primary driver for reduced milk output in those years. A few months later, world dairy prices began trading at historical highs as the world was short dairy solids. These events have created a connection between El Niño and dairy over the years. In 1997-98, 2002-03, 2004-05, 2006-07, 2009-10 and 2012, the Pacific Ocean’s temperature was warmer; all but 2012 registered officially as El Niño events. Each of these years was followed by above average U.S. milk and dairy product prices.
At the start of December, reports of El Niño and water rationing in New Zealand pushed nonfat dry milk (NDM) futures contracts 1¢ to 3¢ higher at the CME during the first full week trading. As milk protein concentrates (MPC) and some whey protein concentrates (WPC) prices are related to NDM markets a change in trend has wide sweeping impact on several dairy products. While an El Niño forecast merits monitoring, the idea that an increased possibility of a weak El Niño cycle could support Q1 NDM markets, given the supply and demand situation globally, is questionable.
Significant, global weather events do work their way through dairy markets, but typically there is a delay between the onset of the event and the price move. Case in point, the latest price run up had several supply-side issues, but each had a lag. In 2012, poor weather conditions in Europe depressed milk output through much of 2012 with the impact rolling through markets in late 2012 and early 2013. Similarly, the 2012 drought in the United States that drove up feed costs likely impacted early 2013 dairy product prices. The 2013 February-March drought that affect New Zealand’s output began affecting markets later in that year – likely the second-half of the year. And finally, weather related issues in China during August 2013 likely propelled markets higher in early 2014. Why the delay? Initial contracts may not be affected by the event. Farms tend to contract feed once or twice per year; therefore a shift higher or lower in feed prices normally do not affect farm margins until the new contract period. Similarly deteriorating feed quality in Oceania today doesn’t necessarily translate into a sharp decline in milk production; however, forage needed for late season or winter months could be affected resulting in a deferred impact. Finally, dairy products throughout the world are contracted several months in advance. Buyers securing product today for the first half of 2015 might not see any impact until they return to the market later in the year to find weather conditions could have changed the supply forecast.
In summary, El Niño has historically played a role in influencing world dairy product prices by distruptin weather in the southern hemisphere. How much and when is far more difficult to discern. There are several factors to consider like the demand forecast for dairy products as El Niño only provides some explanation to a supply side change. Additionally, how the El Niño effects Oceania is fundamental to understanding the potential impact to world dairy product prices. Droughts in Oceania tend to affect dairy product prices due to the influence New Zealand, and Australia have in global dairy trade. Add to this feed prices, on-farm profitability and a host of other factors. That said, El Niño does have a history with dairy product price and merits adding to the list of items that could influence price.