EU Surplus Driving Global Markets
Last fall, the U.S. Dairy Export Council (USDEC) wrote that world dairy demand can only support milk production growth from the major exporters of about 1.5% a year. In the second half of 2017, the growth rate from the EU-28, United States, New Zealand, Australia and Argentina was about double that. Since September, USDEC says nearly all the surplus growth is coming from Europe.
Facing a mountain of skim milk powder (SMP) and a butter bubble that may not be fully deflated, USDEC predicts large volumes of cheese will be coming out of European vats in the months ahead.
Processor payout prices that increased more than 30 percent in 2017, and farmers have responded. USDEC says that while milk checks are coming down, it's not happening quickly enough to slow production. The spring flush is looming as EU pastures begin to green.
And then there’s the matter of intervention stocks of SMP—still near 380,000 tons. USDEC says the Commission won’t add any more to the stockpile this year, which takes out the floor price and leaves room for the SMP price to still fall.
USDEC says it will take some other creative measure besides price—like food donation, feed use, overseas placement or something else—to clear the inventories. The United States, too, is sitting on record powder inventories that continue to grow. According to USDEC, year-end holdings were 150,000 tons, up 47% from the prior year.
In the United States, milk production growth has slowed to a more measured pace. Output in the last four months of 2017 was just up 1 percent. Feed costs remain low, but milk prices are down nearly 20 percent from a year ago, squeezing margins. Modest production growth—around 1 percent—is expected for 2018.