milk
December 21, 2016

Profits On The Horizon in 2017

 |  By: Tom Bailey

As we ring in 2017, dairy producers around the globe are saying farewell to a tough year of low prices and ushering in some profitability.

As 2016 drew to a close, global dairy prices saw a sustained rally in with average prices across the major dairy commodities up 35% since August.

However, U.S. prices did not see quite the similar gains. They were held back by continued milk supply growth, heavy stocks, and lower demand growth.  As a result, international prices rose to us creating a convergence of international and domestic prices for cheese and butter after nearly two years of U.S. premiums.  

With six of the seven major export markets remaining under significant pressure after two years of extremely low margins and unfavorable weather, the world has turned to the excess inventory to help satisfy growing demand.

The EU has been a significant factor in the drop in supply due to low margins, decreasing yields, government incentives for supply reduction, and new phosphate regulations in the Netherlands forcing up to 200,000 head of dairy cows out of commission in 2017.

The U.S. has been an important exception to the countries facing pressure. In the U.S., producers saw a 2.5% increase in production year-over-year for October. U.S. milk production has benefited from high quality feed and favorable weather. Meanwhile, U.S. commercial disappearance of milk in liquid equivalent terms has turned negative (-1.3%).  Retail data shows demand for natural cheese was down for the first time in more than 2 years, and yogurt also moving deeper into negative territory. This drop in U.S. demand growth is mostly the result of strong comparables, but it is not helped by the economic uncertainty the country went through back in October/November as it came around to a tumultuous election season.

With a new year upon us, the outlook for the global market remains decent from a farmgate pricing standpoint. Rabobank is forecasting global milk supply to be slow to pull out of its contraction phase while international demand steadily grows. The U.S. will be the only market still growing supply thus we may well be the only country in a position increase exports. As a result, we shouldn’t be too overburdened by existing stocks of cheese and butter.

The upward pressure we have seen for dairy powders do have limits though as the EU has only cleared 40 MT of the proposed 20,000 MT in its initial offering of intervention SMP stock onto the market. And there is more where that came from; the EU has nearly 400,000 MT of SMP to offer and wants to sell it in 2017.

While there is an oversupply of protein powders, the global market is short on milk fat and global butter prices are moving higher as a result.  The price increases in milk fat should help to offset the pressure on proteins. The end result is a US. All-milk price around $17/cwt for the next 12 months and with plenty of cheap, high-quality feed around U.S., farmers should continue to see some profits through the year.

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