Five Wild Cards to Watch in 2017
There are five wild cards dairy farmers need to watch as they enter 2017 and contemplate risk management options for the year, says Mary Keough Ledman, editor of the Daily Dairy Report.
Ledman spoke this week at the Minnesota Milk Producers Dairy Conference and Expo in St. Cloud.
Wild Card #1. The global dairy sector.
“The perfect storm for high milk prices occur when output in the European Union, New Zealand and the United States is lower than historical growth rates,” she says. In 2016, the European Union is down almost 3% and has a milk diversion program in place for at least the first quarter of 2017. New Zealand was also down 5.5% in October year over year. That’s significant because October is New Zealand’s flush when pastures are the most lush and cows are milking at their peak. Of the big three players in global markets, only the United States is seeing increased milk production, up 2.5%. That’s the highest increase year over year since 2014.
Wild Card #2. The changing landscape of U.S. milk production.
“In October, out of the 23 major reporting dairy states, only three states declined in milk production: Florida, Utah and Virginia,” says Ledman. Even California increased production, the first time this has occurred in 22 months. The strongest milk production growth came from the Dakotas east. Lack of processing capacity in Michigan, Ohio and Indiana means that basis in these states and areas that are absorbing their surplus is weakened until more processing capacity is built. U.S. cow numbers are also at their highest level since 2008.
Wild Card #3. Ample stocks of butter and cheese.
“Cheese, butter and non-fat dry milk stocks are declining, but remain ample,” says Ledman. “Recent monthly drawdowns of butter stocks bode well for prices.”
Because U.S. cheese prices were higher than those in Europe and New Zealand, the U.S. imported a lot of cheese in 2016 and put a share of its own production into inventory. “For much of 2016, cheese markets were burdened by high stock levels. They are not nearly as large going into 2017,” she says.
Wild Card #4. Price convergence.
As noted above, high prices for U.S. cheese and butter made U.S. exports of these products come to a screeching halt in 2016. In fact, U.S. cheese exports in the first half of the year were close to a 10-year low. “In August, there was a convergence of cheese prices between the U.S. and the rest of the world, which stopped cheese from being imported here,” she says. “Going into 2017, U.S. cheese prices are much closer to EU and Oceania prices.”
U.S. butter prices are still high, but they are converging with world prices and reducing the incentive to continue to import more butter.
A strong U.S. dollar against the Euro also did not help U.S. exports. The one bright spot for the U.S. is non-fat dry milk power prices. Mexico has been a huge market for powder in 2016. “We do not want any walls separating us from Mexico. Mexico is as important an export destination for U.S. dairy products as China is to New Zealand,” says Ledman.
Wild Card #5. Weather.
No outlook is complete without talking about the weather, says Ledman. Drought seems to be spreading in the West and Southeast. California, while it has had some rain, remains a trouble spot. The biggest trouble spot is the Southeast, where the area of drought seems to be growing in areas that rely on pastures and grazing for much of their forage. The Midwest seems to be the only region to be in good shape when it comes to adequate soil moisture. But again, December is way too early to make any predictions on how weather patterns will play out in the 2017 growing season.