What the milk glut tells us

Whether it's milk or oil, prices around the world are falling off a cliff edge, says Merryn Somerset Webb.

This week,we look at the milk market in the UK. At first glance, the plight of Britain's dairy farmers looks like it has been caused by the usual suspects the supermarkets. But look closer and you see that while their policies might not have helped, the real action is outside their sphere of influence.

Look at a chart of the global milk price and you will see that it peaked at near 35p a litre, then started falling fast into the end of last year. It is now around 20p. That's a 40% fall and a seven-year low.

Prices haven't fallen slowly. They have, as one frustrated farmer put it in the Financial Times, "fallen off a cliff edge... we've gone from boom to bust in six months".

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Sound familiar? It should. It is exactly what has happened to the oil price. So what's going on? Our piece looks at the supply-demand mismatch in the market. According to UK-based dairy co-operative Arla Foods, the global milk supply, driven partly by the rising yields from super-intensive farming, is rising at 5% a year, while global demand is rising at just 2%.

But to find out why that imbalance exists, you will need to turn to our interview with Paul Hodges. It is about the slowdown in demand resulting from our changing demographics and it is about China.

The post-financial-crisis period has seen China pour almost unimaginable amounts of financial stimulus into its economy (think $10trn, says Hodges). But President Xi doesn't want to do that any more. He wants, as Hodges puts it, to move away from creating consumption via property bubbles to creating consumption via higher incomes. That's a tougher and more long-term economic strategy to implement.

It is also why China is slowing so fast Diana Choyleva of Lombard Street Research reckons growth had already slowed to 3.4% a year by the fourth quarter of 2014. It's also why oil and milk prices have collapsed. Both moves are symptoms of the "great unwind" of the extraordinary monetary policy of the last few years and, to Hodges' mind, of the beginning of a long period of deflation and market volatility.

What can you do about this? You can take Hodges' advice and just hold cash. But in the equity markets all you can really do is look for quality firms trading at reasonable prices, preferably in markets where monetary easing is nearer its beginning than its end.

With that in mind, our cover story this week looks at how you can invest in the best-quality stocks in Europe so taking advantage of the way quantitative easing (QE) tends to boost markets, but using quality as your insurance should the slightly insane era of central-banking experimentation go horribly wrong. Something that, as the UK's dairy farmers can tell you, is entirely possible.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.