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November 24, 2016

Chutes and Ladders Promise Potential of Milk Price Uptick

 |  By: Anna-Lisa Laca

As dairy producers, you know better than anybody how tough 2016 has been at the farm gate. Milk prices have remained depressed for most of the year, improving slightly the past few months. Some producers are barely breaking even and out West the milk price has remained below the cost of production for more than 12 months on some farms. Will 2017 be any better? Rabobank economist Tom Bailey equates the 2017 market outlook to the children’s game chutes and ladders. “While there are some chutes in the market still, we are long on ladders and I do think the market is going to come up a bit,” he says.

Chutes of the Market

  • U.S. Production Growth There are seven major exporters in the world. Of those seven, six of them have reduced milk production. The U.S. has not. In fact, Bailey says it’s likely to continue to grow in part because of low feed prices.
  • Strong U.S. Dollar Pressuring Price The American economy is doing very well compared to the rest of the world, says Bill Biedermann, a market analyst with Allendale. Meanwhile, Japan, Italy and Spain are facing negative deflation issues. When countries are facing economic problems like that, investors avoid those currencies and turn to the U.S. dollar instead. Bailey expects the U.S. dollarto remain strong given the global economic environment putting a ceiling on price recovery.
  • Inventories Are Heavy Not only is the U.S. sitting on a stockpile of dairy products, countries around the world are too and buyers know the market is long on milk. “The EU is sitting on nearly 800 million pounds of skim milk powder,” says Mary Ledman of the Daily Dairy Report.
  • Global Economy is Still Wobbly The global market has not recovered as many expected, according to Bailey. “In 2015 we had an expectation of 2016 growth of 4.5%, it’s recently been revised down to 3.5% total GDP growth,” he says. The global economy could limit demand growth.

Ladders to Higher Prices

  • EU Milk Production Milk production across the EU has declined in the past few months and Ledman expects that to continue with farmer incentnive programs. “The EU is paying producers to reduce output during Q4 2016, plus Dutchbased Friesland-Campina is offering an additional premium of $5/ CWT for reductions in milk output for October through March 2017,” she says.
  • Production Growth Slowing among Big 7 exporters, according to Bailey. “We expect another six months of decline,” he says.
  • U.S. Demand Outpacing Supply according to recent data. “We will be at the lowest exportable surplus we’ve been at since 2009,” Bailey says.
  • Government Intervention will aid market recovery. Intervention items include the EU supply reduction scheme, the proposed Federal Milk Marketing Order in California and USDA cheese buybacks.

What does that mean? “We see continued pressure for a little bit of time,” Bailey says. “We expect a short-term increase in prices, followed by a flat period and a slight uptick in late 2017.” Rabobank forecasts show Class III milk reaching $17.77 by Q3 2017.