milk
January 5, 2017

Milk Price Optimism in 2017

 |  By: Robin Schmahl

Many would say 2016 was not a very good year for milk prices. If compared to many other years, that certainly is the case. After all, we did experience very lower milk prices during the first half of the year with milk price moving to the lowest level since 2009 for the month of May.  The market was adjusting to a slow export pace and building cheese inventory. Prices declined in the attempt to stimulate demand. This was the case for cheese; however it was not the same for butter. Butter price did decline below $2.00 for much of the month of March and then again for about 2 months from mid-September to mid-November. The rest of the year it remained above $2.00 indicating steady demand and the potential for improving demand. Despite butter inventory remaining 21% above a year ago according to the November Cold Storage report, price finished the year very strong. Improving world demand for butterfat and reduced production from some countries improves the outlook for 2017. Australian butter exports for the first four months of their production season are running 13% below the same period last year. Butter production in the United Kingdom during the month of October was 6% below a year ago. As a result, butter imports have been increasing over the past six months pushing import volumes for the UK at 6% above a year ago. Milk production in the country is running 8.6% below last year and may finish out the year at that pace.

Not all countries are down on milk production or lacking in the inventory of some dairy products. Ireland had been pushing milk production prior to the removal of quota in 2015 and despite low milk prices. Milk production is Ireland is on track to be 5% above last year and is expected to expand again next year as milk prices improve. Inventory of skim milk powder is very large in the European Union. The EU has 352,951 tons of skim milk powder in government intervention. This is a program where the government purchases product to remove it from the market to support price. This product is then offered to the market at a latter time when prices are better allowing it to be absorbed without overwhelming the market. Most of the powder came from Ireland.  During the second week of December, the EU opened up for tenders to those who wanted to purchase product, but they only accepted bids for 40 tons of the 22,150 tons they offered for sale. Buyers are not very interested in supply of skim milk powder at the present time. Bids were placed for aged skim milk powder from late 2015, but the EU Commission decided not to accept them due to prices bid too low. This is a lot of power that will need to come to the market potentially limiting price increases on the Global Dairy Trade auctions. However, nonfat dry milk/skim milk powder exports from the U.S. are running 6% above a year ago for the first 10 months of 2016 and were up 16% in November compared to the previous year.

So what does this mean in terms of milk prices for 2017? Maybe not a whole lot for the U.S. if overall domestic and world demand continues to improve. The greater issue that we may be facing the impact of growing inventory of butter and cheese on milk prices. Despite growing demand, inventories have been steadily increasing with record cheese inventories seen for multiples months in 2016. By all indications, inventory of cheese and butter will finish the year above last year once the final figures are released later this month. This provides a somewhat bearish start to 2017 as far as inventory is concerned, but current inventory is not overwhelming the market as the anticipation is for improving demand. There is greater optimism for 2017 and we hope better milk prices will come to pass.

Upcoming reports:

  • World Agricultural Supply and Demand report on January 12
  • December Livestock Slaughter report on January 19
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