January 23, 2018

Milk Price Fate In Hands Of Other Countries

 |  By: Mike Opperman

Because U.S. dairy producers make more milk than can be absorbed by U.S. consumers, a significant amount of attention needs to be placed on what happens outside our borders when talking about markets. That includes keeping an eye on our largest competitors—New Zealand and the European Union (EU)—but also on our largest customers—Mexico, Canada, China and Southeast Asia.

At the 2018 International Dairy Foods Association Dairy Forum, Tom Bailey, executive director of dairy research with Rabobank, provided insights into global trends that could impact the industry here in the U.S.

The last half of 2017, global supply significantly outpaced demand, with much of the excess milk coming from the EU. Production in the EU was up almost 6% in November. To put that in perspective, that is equivalent to the U.S. being up 9% over the previous year.

“There has been a lot of milk coming onto the market and demand growth has been weak,” Bailey says.

What makes the increased production significant is the drop in demand growth over the last quarter of 2017, especially among some significant trading partners. For example, Mexico was down significantly compared to the same period in 2016.

“Over this period a year ago they were buying very aggressively due to the uncertainty of the presidential election as a hedge to secure supply,” Bailey says.

Those buying patterns slowed down during the same period in 2017.

An exception to the downturn in demand is China. Hot weather and heat stress dropped domestic production about 1.5%. Bailey says “they came into the market in a big way, bringing in about 17% more milk for the full year.”

Even with China buying more, prices have fallen due to an oversupply of milk and weakening demand. So what does the future hold?

“We’ve seen the market take a little bit of a breather recently,” Bailey says. “New Zealand’s drought unfolded and there are estimates that production will be down about 2%.”

While recent rains have brought relief, it’s probably too late to save this year’s pastures. Unfortunately, the impact on the market won’t be enough to see significant price change, Bailey says.

Another impact on prices will come when the EU decides what to do with the mountains of milk powder currently in intervention storage. While a small portion of that supply was recently offered, that portion amounted to less than 1% of the total powder supply. And the price tendered for that powder was significantly below the initial purchase price, which, Bailey says, indicates that the EU is willing to take a significant loss on that product. According to Bailey, so far global prices haven’t reacted to the lower tendered price, so it’s expected that protein prices will remain relatively low in the near future.

“That protein pricing environment will have an impact on production,” he says. “It’s going to continue to slowly make its way back to the farm gate but it’s going to be slow.”

Looking at production going forward for the rest of 2018, Bailey expects things to gradually slow and be flat, at best, at the end of the year. He’s looking at the EU to be up about 1%, the U.S. to be up at its normal 1 to 1.5%, and New Zealand to be off about 2%.

“With that production decline, there’s actually more good news on the horizon for prices,” Bailey says. “We’re on the cusp of global economic growth so we should expect global demand to be strong which should translate to positive demand for dairy products.”

But with the huge EU stocks and continued growth of supply, Bailey doesn’t see a huge amount of rebound of milk prices.

As with any forecast, there are outside factors that could impact where prices end up. A potential North American Free Trade Agreement (NAFTA) withdrawal would have a significant impact, primarily by opening up competition for Mexico’s business, which accounts for about 32% of U.S. exports. Bailey points out that the U.S. has a lot more to lose from a NAFTA withdrawal because so much is riding on trade with Mexico and Canada. While the U.S. continues to negotiate NAFTA, New Zealand and the EU continue to find new and more trading partners to diversify its customer portfolio.

“We’re left with Mexico and Canada,” Bailey says. “If we lose access to these key markets, we don’t have a lot of places to send our milk. This is something that we need to think about and make sure that we are pushing to get trade access into relevant markets that have solid growth in the future.”

Another significant factor lies in what the EU decides to do with its powder stocks.

“That would derail our forecasts if those stocks came into the market in a big way,” Bailey says.