June 10, 2016

News on the Horizon Not All Bad

 |  By: Tom Bailey

Though milk production is beginning to decline in key export markets, inventories in the U.S. and European Union (EU) have continued to swell through the first half of 2016. In the U. S. inventories of natural cheese and butter stocks hit record highs during the month of April. With cheese stocks at unprecedented levels, the U.S. is officially in a cheese glut with little end in sight. Per-capita consumption of cheese in U.S. has risen by nearly 1 lb. in the past 12 months and will likely increase by similar levels in the next 12 months. But this is still not enough to offset today’s massive inventories. Americans would need to eat an additional 3 lb. of cheese in 2016 to clear today’s stock.

But the market’s cue for farmers to produce less milk is being ignored. With a mild winter, warm spring and feed prices remaining relatively low, most U.S. dairy farmers have had compelling reasons to grow supply. U.S. milk supply grew by 2% in the first four months of the year. However, the U.S. has only accounted for 16% of the exportable surplus growth in 2016; the EU has accounted for 63%. In the first three months of 2016, the EU added 1.9 million liters of milk to the market, versus 2015 volumes.

EU milk production grew despite an average milk price of 0.27 euro per liter, which is below breakeven for most European producers. The Netherlands and Ireland accounted for 40% of this growth. Increased production in Ireland continues to be less of a surprise with its low cost, pasture-based model and extensive capacity for growth.

On the other hand, the Netherlands warrants a closer look. Milk volumes have continued to increase despite falling farmgate milk prices. Dutch phosphate quotas help explain part of this anomaly. Uncertainty around the Netherlands’ phosphate limits led farmers to either hold or bolster their herds with the purpose of setting a high benchmark for future reference limits. Quota limits have finally been announced and culling rates have begun to pick up.

The Netherlands is expected to slow dairy production growth in the near term, thereby helping to pull down the EU’s total volume growth. Today, New Zealand farmgate milk prices remain the lowest of major export markets. Fonterra’s current farmgate milk price of $3.90 per kilogram of milk solid ($12.20 per cwt) has put New Zealand farmers under significant pressure. New Zealand’s milk supply for the 2015/2016 season is currently tracking 2% less than the previous season.

The end is not in sight for New Zealand farmers, either. Fonterra has announced a 2016/2017 milk price of $13.31 per cwt. This will discourage supply growth for another 12 months. With the EU finally looking to put the brakes on excessive milk supply growth, global inventories will probably become more manageable. The second half of 2016 will see international prices for dairy commodities continue to slowly work their way to modestly higher levels. However, the recovery will be late, low and slow for U.S. dairy producers, as the country continues to export less and import more due to our premium market and strong U.S. dollar.