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December 21, 2017

Bearish Dairy Markets to Persist Well Into 2018

 |  By: Jim Dickrell

Lackluster dairy prices are on tap for at least the first half of 2018, and perhaps a bit longer, says Dan Basse, president of Ag Resource Company based in Chicago, Ill. Basse spoke on an hour-long webinar hosted by the Professional Dairy Producers of Wisconsin this week.

“Dairy prices are stuck in the range of $13.25 to $17/cow for Class III for the next six to nine months,” says Basse.  “We doubt rallies above $17 for Class III can be sustained.” The reason is two-fold: Large stocks of dairy commodities in both Europe and the United States, and growing milk supplies worldwide.

The good news is that the stocks aren’t at record levels and a strong economy through much of the world will continue to nibble away at those holdings. Milk production also appears to be slowing, eventually bringing supply back in line with demand. But all of this will take time, says Basse.

His comments mirror analysis of Rabobank, which also released its fourth quarter analysis of dairy markets this week as well: “Rabobank forecasts a noticeable slowdown in U.S. [milk] supply growth in 2018, hovering at around 1.2% in the next 12 months.” U.S. dairy demand could increase 1.5% in 2018, but that still would not be enough to offset rising supply since U.S. consumption represents 85% of U.S. milk production. So U.S. prices again will be dependent on world markets to take surplus supplies.

The good news, says Rabobank, is that “China’s imports in 2018 of dairy products will continue to grow, albeit at a slower pace of 8% year-over-year.”

Basse says that feed prices, at least corn and soybean meal, should remain flat at least into summer. He expects corn prices to range from $3.30 to $3.75/bu into spring. Soybean meal will range from $305 to $350/ton into mid-year, he says.

The one feed concern is hay. Dry weather in the western half of the U.S. this past year means hay stocks there are down, and could mean higher prices as western dairy producers seek more forage. Currently, alfalfa prices are at about $150/ton, or roughly 25% below the four-year average.

Basse also expects prices for cull dairy cows to strengthen in the first quarter of 2018. But because of dry weather in the West, more cattle could be coming to market in spring and again depress beef prices. So dairy farmers should cull early in 2018 if they’re planning on more than normal culling, he says.

Other nuggets from Basse:

• Interest rates will creep up next year. “The U.S. Central Bank will likely raise interest rates three times in 2018,” he says. Expect rate increases to occur in March, next summer and next fall.

• Congress likely won’t write a new Farm Bill any time soon, with Democrats wanting to wait until 2019 after the mid-term elections next November.

• If the North American Free Trade Agreement (NAFTA) fails and the U.S. announces a pull-out, don’t panic. The agreement has an automatic, 12-month cooling off period written into it, allowing negotiators more time to reach agreement.