Milk Price Recovery Hinges On These Three Factors
Early in 2018, as U.S. dairy producers were wallowing in an extended period of low milk prices, expectations were that milk prices would slowly recover through the balance of 2018. Then trade disputes and tariffs through a wrench in those plans, throwing the expectations of a price recovery into limbo.
As the market begins to normalize around ongoing trade negotiations, we can begin to look at the factors that will impact milk prices through the balance of 2018 and into early 2019. According to Nate Donnay, director of dairy market insight at INTL FCStone, three factors will determine whether prices slowly improve, or decline, over the next few months.
- Relatively slow production growth in the northern hemisphere. USDA pegged July milk production at just a 0.4% growth over July 2017, due to fewer cow numbers and a smaller increase in production per cow than expected.
The herd reduction is an indication of producers selling off cows in a response to low milk prices. “Weak margins early in the year are now showing up in a decline in the dairy herd during the second half of 2018,” Donnay says. He expects the herd to decline a few thousand head per month over the balance of the year.
With regard to production per cow, Donnay says that over the past 12 months milk production per cow has been about 20 pounds per cow below trend. Prior to 2015, Donnay says, production grew at about a 1.5% growth rate. Since 2015, that growth has slowed to about 1%. However, production of milk components continues to grow at a faster rate than trend would suggest. Donnay says that this could be due to a growth in Jerseys and crossbreds in the national herd.
“We have to assume going forward that the growth in production per cow will run at a slower pace than it has historically,” Donnay says. “That slower growth is being made up from a faster growth in component production.”
- Domestic demand. A few factors point to an increase in domestic demand. Kids are going back to school, which means more product going into school lunches. Football season is upon us as well, so pizza sales will increase. And the holidays are just around the corner, which will bolster butter demand.
- Global demand. Export markets have slowed, with the Global Dairy Trade trending downward 5 times in the last 6 auctions, including down 6% last week. Donnay says major exporters are dealing with weak global demand, particularly from China. Current low prices on the GDT and particularly from New Zealand are likely impacted by the decreased Chinese demand growth.
“If Chinese demand is that weak, it really does limit the upside for U.S. and EU prices going into the fall,” Donnay says, despite relatively weak growth in milk production in both regions. He says that it’s possible that weak global demand could result in a drop in milk prices, which would be counter to normal pre-holiday price recovery, going into the holiday period.
According to Donnay, current pricing will hold, or even push a little higher, because of existing domestic demand and relatively lackluster production in the EU and the U.S. But he sees a fairly steep drop off in prices after the holidays if prices and production holds together and Chinese demand doesn’t return.
Will Chinese demand return? Probably not, Donnay says, since we’re already into the second half of August and only about four months remain for demand to improve in 2018. “We’re sort of running out of time for that buying to start to show some improvement for 2018,” he says.
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