Lid Lifted on Milk Powder Prices
Global milk production has slowed from 2018 levels, and strong demand for milk powders has pushed both world and U.S. stocks of skim milk powder (SMP) and nonfat dry milk (NDM) to levels not seen in years. Low stocks, slowing output, strong demand, and a fairly healthy world economy could support milk prices in 2020 at above-average levels, according to Sara Dorland, analyst with the Daily Dairy Report and managing partner of Ceres Risk Management, Seattle.
With milk production in the top dairy-exporting regions and Brazil sitting just above 2018 output, stocks have provided a buffer between slowing supply and accelerating demand but that cushion no longer exists, Dorland notes. “Nonfat dry milk and skim milk powder stocks had been acting as a lid on global protein markets, but that lid was lifted mid-year, and dairy protein prices have since moved higher. At the end of October, stockpiles of nonfat dry milk and skim milk powder (SMP) were at their lowest levels in years,” Dorland says.
In USDA’s recent Dairy Products report, manufacturers’ stocks of nonfat dry milk (NDM) at just shy of 220 million pounds were the lowest for any month since November 2016. Even as year-over-year NDM production was increasing in the second half of this year, demand for powder was outstripping supply, she notes.
“European stocks of SMP are also low, and Europe’s Intervention coffers have been depleted since mid-year,” Dorland says. “When considering EU-28 and U.S. reported stocks together, current holdings have not been this low since October 2014.”
A year ago, CME spot NDM prices were close to 90 cents per pound. Today, they are roughly 30 cents greater than they were a year ago and higher than they’ve been in five years. For next year, CME NDM futures anticipate prices will range between $1.25 and $1.32. Dorland notes that the last time world stocks of SMP/NDM were at current levels with demand strong—the August 2012 through October 2014 period—the National Dairy Products Sales Report (NDPSR) price for NDM averaged $1.71/lb.
“The past five years may not be a good indicator of 2020 market movements, due to the momentous difference in stock levels between the two comparable periods,” Dorland notes. “It seems the period between August 2012 and October 2014 could be a better benchmark. The one caveat is that trade supply-and-demand patterns were different then than they are today.”
While the global surplus of SMP weighed heavily on milk protein prices over the past five years, butterfat values were strong. The difference between dairy protein and butterfat prices caused producers to manage their herds in a way to achieve higher component levels of butterfat.
“Going forward, the difference between the value of butterfat and dairy protein could be much closer relative to the previous five years, and that suggests 2020 cheese and NDM prices could find balance at higher prices than in recent history,” Dorland adds. Butter prices, however, could trend lower because current supplies are more than adequate to meet demand.
“Currently, dairy markets are suggesting prices could be above average through 2020, with Class IV milk prices appreciating throughout the year,” Dorland says.