Global Dairy Prices Pulling U.S. Prices Higher
Despite growing world milk production and rising dairy stocks, global dairy product prices have risen from the lows posted in first-quarter 2017, and U.S. dairy product prices have followed suit. In March 2017, global milk production in the top-five exporting regions and Brazil recorded its first year-over-year production gain of more than 1% since February 2016. The global recovery in milk production is driven by positive year-over-year production gains in Europe, New Zealand, and the United States.
The 28-member European Union accounts for more than 30% of world milk production. EU milk output improved by nearly 0.5% in April compared to the same month a year ago—despite lower year-over-year production from top-ranked Germany and France, which reported decreases of 3.2% and 1%, respectively. April output in the United Kingdom, the third largest milk producer in the bloc, was on par with last year. Dutch milk production in April fell 0.4% below April 2016 and was down 0.7% compared to May 2016. Additional year-over-year decreases are expected as the Dutch dairy herd contracts in compliance with new phosphate limits.
Impressive gains from Ireland and Poland that more than offset lower output from other key dairy-producing member states spurred greater European milk production. Ireland’s milk production, which is largely pastured-based, soared 40% from March, besting the typical seasonal increase. Irish milk output exceeded the prior year by 12.1%, or 95 million metric tons (MT). Milk production on the Emerald Isle is likely to post seasonal month-over-month gains through June. Polish milk production posted a more measured 1.5% monthly gain over March and was 4.1% or 38.6 million MT greater than April 2016. Looking forward, European milk output is expected to continue to post modest year-over-year production gains because milk prices have improved more than 25% compared to last year. However, hot weather conditions across France could take a toll on cow comfort, resulting in a larger year-over-year deficits and making it more difficult for Ireland and Poland to offset lower output.
Output in Oceania (New Zealand and Australia) finished the season better than anticipated. Significant year-over-year production gains in New Zealand countered lower Australian milk production to push Oceania milk output into positive territory in March and subsequent months. The outlook for the 2017-18 milk production season is bright because milk prices have improved and favorable weather conditions support strong year-over-year gains in Australia, which suffered from excessively wet conditions during the past season.
As global milk production continues to improve, milk output in the United States, which accounts for 20% of global cow milk production, continues to expand. In fact, U.S. milk production has recorded year-over-year gains in every month since December 2013. At 18.9 billion pounds, U.S. milk production in May was 1.8% (327 million pounds) above May 2016 levels. Just like in Europe, the United States’ top two milk-producing states, California and Wisconsin, posted lower year-over-year production, down 1.1% and 0.7%, respectively. The California dairy herd trails last year by 11,000 head, and milk per cow is off due to cold, wet conditions from earlier this year. In Wisconsin, cow numbers are unchanged from the previous year, but milk per cow is off due to less-favorable weather conditions and the processor mandated elimination of rBST. Granted, Wisconsin posted year-over-year May production gains of nearly 5% in both May 2015 and May 2016. Looking ahead, the U.S. dairy herd of 9.393 million head is at its highest level in more than 20 years. With 71,000 additional cows in the milking string, it’s hard to imagine a slowdown in U.S. milk production growth.
One might expect all this additional milk production to result in lower milk prices. That is not the case, thanks in large part to escalating global butterfat prices. In 2015 and 2016, U.S. butter prices exceeded global butterfat prices and attracted sizeable butter imports. However, as of mid-2017, U.S. butter prices near $2.65/lb. are on par with prices in Oceania and at a 10-cent per pound discount to European butter prices. As a result, butter imports to the United States will decrease while butter exports increase, buoying producers’ milk checks.
The situation is similar for the cheese market. After surpassing global cheese prices for more than two years, U.S. cheese prices converged with those in Europe and Oceania in March 2017, largely due to rising global prices, which continue to move higher. The June 20 Global Dairy Trade (GDT) cheese price index averaged $4,121/MT, or $1.87/lb., for cheese delivered in contract months July through November. That is more than a dime higher than current CME Cheddar cheese futures during the same period. If U.S. Cheddar cheese continues to trade at a discount to New Zealand cheese, U.S. Cheddar cheese exports should improve while cheese imports from New Zealand retreat.
The nonfat dry milk (NDM) market is the weakest link in the dairy product complex. Nevertheless, even NDM prices have improved from below the 80-cent level to more than 90 cents per pound. Given ample milk supplies across the United States and stiff export competition, it is unlikely that U.S. NDM prices will rise above $1/lb. by year end.