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March 16, 2018

Dairy Markets in ‘Process of Bottoming Out’

 |  By: Jim Dickrell

If there’s any silver lining in today’s dairy markets, it’s that the markets likely won’t get much worse, says Dan Basse, an ag economist and president of AgResource Company based in Chicago.

Basse spoke at this week’s Professional Dairy Producers of Wisconsin Business Conference in Madison. “I think the dairy industry is in the process of bottoming out,” he told some 1,100 attendees. He doesn’t foresee a lot of downside risk in milk prices, with Class III prices trading in the $13 to $17 range this year.

“I don’t think dairy markets will go down very much unless President Trump makes a mistake,” he says.

One of the problems has been the strong U.S. dollar, which makes it difficult for U.S. dairy and other ag products to be competitive globally. “We need the U.S. dollar to drop 20 to 30% to spark a lasting U.S. ag economy recovery and cut non-U.S. world ag production,” he says.

The dollar is down 6% in the last 9 months, triggered in part by President Trump’s erratic and unpredictable behavior. Trump’s actions are taking global confidence in the U.S. down. “In a strange way, that has been good for all of us [in terms of making U.S. products more competitive globally],” he says.

U.S. dairy exports are expected to grow 6% in 2018, says Basse. But for a full price recovery back to $24/cwt milk, exports would have to grow some 50%, going from 14% of current U.S. production to 21%. That could only happen with a combination of better marketing of U.S. products globally and a continued decline in the value of the U.S dollar. Such a rebound is not expected and unlikely this year, he says.

“We need to build demand for butter and powder, assuming Trump will allow it to happen,” he says. If President Trump imposes tariffs on Chinese products, that could result in retaliatory tariffs on U.S. dairy products moving into China. Tearing up the North American Free Trade Agreement (NAFTA) with Canada and Mexico could also create major trade disruptions.

While there may be few short-term opportunities to lock in better milk prices, Basse urges dairy farmers to pay attention to costs. For example, if the drought in the High Plains spreads east, that could mean higher feed prices, particularly for forages. If you have an opportunity to look down current feed prices, now may be the time to do so, he says.

Basse also sees a flood of cattle coming to market in the second quarter of 2018 as cattle were placed into feed yards sooner than normal due to poor pastures. Those cattle will be coming to market sooner rather than later. If you have an opportunity to cull older or poor performing cows, now might be the time to do it, he says.





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