unknown markets
March 7, 2019

Can Milk Prices Hang On To Upward Momentum?

 |  By: Anna-Lisa Laca

Milk markets gained upward momentum toward the end of February. Can they hold onto improved prices long enough for them to reach the farm gate? Tom Bailey, senior dairy economist with RaboAg Research says there are three key milk price improvement factors to watch over the next six months. 

1. European supply. “The EU [intervention] stocks were the big thing we had been watching,” Bailey explains. “Now that they’re pretty much gone we’ve refocused our attention back to this rally in the market, specifically European supply responsiveness to this pricing momentum we’ve seen.” The past several years the EU powder stocks had put a ceiling on the market. “As soon as things got lofty prices would kind of bounce back off,” Bailey says. The stocks had also been a leverage tool in negotiations for sellers of milk powder. “So, they’re going into any negotiation saying ‘You know what? There’s 300,000 tons of similar powder in intervention, I have plenty of places to buy product from,’” Bailey explains. “With those gone there’s a lot more support in some of the higher prices. All eyes will be on how Europeans respond to improving milk prices as they head into spring flush.”

2. Chinese supply and demand. According to Bailey, a lot of focus is on estimating Chinese supply, because the country has started buying in a meaningful way. “So we’re wondering what’s happening with supply over there that’s brought them back, because by our estimates, they should have restocked by now with the strong purchasing they’ve done.” One key piece of the Chinese supply and demand puzzle is the trade deal that President Trump is currently negotiating with Chinese President Xi Jinping. “I think it’s almost imperative for us to have dairy access in China and as well as other developing markets,” Bailey says. The U.S. is at a disadvantage compared to our global competitors, he adds. “We don’t have the outlets that our competitors overseas do,” he says. “So it’s important for us to get China. But beyond China, we need Indonesia, Malaysia, Thailand, Vietnam, and even Latin America.” A deal with China could create a domino effect with other trade deals and help returns on powder exports. “China is the most important for us and it could greatly benefit U.S. exports and turn us into more of the powder exporter that we’ve started to become. It will certainly relieve some of the pressure on the new powder driers that have gone in.”

3. Domestic supply. According to USDA, December milk production was up 0.5%. Similarly, dairy cow culling, up 5.5%, suggests supply growth to be limited. “It’s becoming a pretty tight market,” he says. “[Price improvement] is going to be a matter of continued lower supply growth of U.S. milk and redirection of milk from cheese, to the extent that we can, into powders which will then be exported, helping alleviate some of the oversupply in cheese. Cheese prices are already looking much better. Demand has been picking up and the latest production figures show U.S. cheese supply down just over 1% in December which has helped push things higher for U.S. cheese prices, spot block prices hover around $1.60 per pound.”