Global Dairy Market in Purgatory
After a staggering 76% climb over 6 months to December 2016, global whole milk powder prices hit the proverbial ceiling (an upper limit in price) and have since retreated 20% through April 2017. As we look at the market in 2017 there is significant economic uncertainty, but the fundamental drivers in the dairy market remain clear. The market sits in a state of purgatory where excess stocks must be cleared before prices can ascend above the ceiling, which was last spotted at $1.03/lb. for NFDM and $1.90/lb. for block Cheddar.
U.S. commercial disappearance for dairy products has continued to grow, +1.5% in Q1 2017 year-over-year. The U.S. economy has been a tailwind for U.S. demand as consumer confidence and low unemployment have opened up consumer wallets for higher-value food and beverages along with more frequent meals away from home. Unfortunately, the global economy has not had the same tailwind for demand with slower than expected growth in China and weaker demand from oil-dependent markets. Looking forward, the geo-political environment veils the market in further uncertainty as markets wait to see what will play out in North Korea, China, Russia, EU/Brexit, and with NAFTA. This uncertainty has created unease in many markets and global demand for dairy is cautiously growing and should continue modestly through 2017.
In terms of milk supply, the U.S. has posted strong growth +2.2% in Q1 2017 year-over-year, steadily outpacing domestic demand for dairy. This growth has come despite a pricing signal that has not signaled growth the last 12 months.
U.S. production has been boosted by a number of factors, particularly cheap and plentiful feed, favorable weather, and consolidation of dairies bringing greater efficiency to milk production. Moving forward, we may see milk supply growth shift back west as a hydrated California dairy industry looks to vote to enter the FMMO which would improve prices.
Meanwhile, the continuously low milk prices are beginning to wear thin for some, particularly in Michigan where producers have faced higher hauling fees due to a lack of processing capacity. It is increasingly likely the U.S. may finally see production growth drop below 1% in the next 9 months as producers outside of California begin to reduce stocking rates, expansions, and supplemental feed usage.
While U.S. exports are up 13% year-over-year for January and February, a strong dollar, frustrated Mexico, and competition from Canadian exports may have prevented exports from being higher. This appears the case as inventories were up 6% year-over-year for March. Any incremental growth in inventories in the world at this point is a troubling sign for dairy prices as the market is already struggling to clear inventories.
With global demand still lackluster and threats of new trade wars looming, of which the U.S. dairy industry is not exempt from impacts, prices will remain in purgatory until production slows and inventory is cleared, at which point the market may resume business as usual.