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August 17, 2016

Better Times Ahead

 |  By: Fran Howard

The market outlook for U.S. dairy producers has improved over the past several weeks. Bumper feed costs should increase margins and the current milk and dairy product supply situation points to higher milk prices as well, both here and globally.

As of early this week, August Class III futures settled above $17/cwt.—the first time since late 2014 that any month settled above that level, according to a recent Daily Dairy Report. The September Class III contract was even higher at $17.25. Moreover, every Class III contract through December 2018 closed at or above $16.06/cwt.

USDA’s Foreign Agricultural Service’s recently released Dairy: World Markets and Trade report states that recent increases in milk powder prices could be the first sign that markets are slowly coming into balance. Between early May and July, USDA notes that skim milk powder prices climbed 11%. This price increase occurred even though the European Union is sitting on large Intervention stocks and the United States has ample supplies of nonfat dry milk for export.  

“Growing uncertainty regarding the availability of future supplies as year-over-year milk production in New Zealand, Australia, and Argentina begins to decline this year is likely driving the recent rebound in milk powder prices,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill.

Milk production in the Southern Hemisphere is on the downslide. Output in Argentina this year is expected to drop 14% below 2015 levels, according to the report. Oceania output has also started to contract. USDA now pegs 2016 New Zealand output at 21.1 million metric tons, a 2.3% drop from 2015 levels. Production in Australia for 2016 is estimated to drop 1% below the prior year.

“Lower milk output in Argentina is due to low profit margins and the impact from severe flooding generated by a strong El Niño in April, which affected major milk-producing areas,” says Ledman. “Preliminary data indicate that milk output in April and May was down 18% to 20% compared to last year.”

On the other side of the weather spectrum, Australia has suffered from lack of rainfall, which has cut into milk production there. “While the precipitation outlook is more positive for the second half of the year, Australian farmers still face lower milk prices and higher feed costs, which will likely further reduce the Australian milk herd and total milk production,” says Ledman. “Similarly, New Zealand dairy producers are facing lower milk prices, which are expected to reduce the use of supplemental feed and increase culling.”       

Back-to-back years of tight margins have taken a toll on producer profitability world wide, which bodes well for a future recovery, Ledman says. Yet despite expectations for an upward trend in milk and dairy product prices for the rest of this year, large global stocks of skim milk powder could create an unsteady recovery.

“Any significant recovery appears unlikely until well into 2017,” notes USDA in the report. But even that’s sounding better with each passing month.