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December 21, 2016

Normal Dairy Price Cycle, with Higher Prices on the Way

 |  By: Jim Dickrell

The coming year could be a good year for milk prices—one that dairy farmers need to replenish credit lines and bank accounts.

“It’s kind of looking like a normal cycle of prices,” says Mark Stephenson, a University of Wisconsin dairy economist. “We’ve had two years of low prices, but prices are starting back up. I’m not sure when we’ll be at the top, but it looks like prices are coming back.”

With lower feed prices, milk-feed margins look very positive as well. “We’re looking at an $11/cwt margin forecast for the year, and that’s a pretty good margin,” he says.

Fellow UW dairy economist Bob Cropp agrees. He’s predicting a Class III average of $16.85 for the year, with $16 prices in the first quarter, mid-$16s through the middle of the year and then rising to $17 by the fourth quarter.  Stephenson shares Cropp’s optimism, but says the fourth quarter of 2017 will largely be driven by how much global dairy stocks are drawn down.

For the first half of 2017, conditions are ripe for improved price prospects. Most major dairy exporting countries have seen milk production drop. New Zealand is down 1%, Australia is down 7%, and Argentina is down 12%. Even Europe is facing some production difficulties, with low margins and environmental constraints. “We’re not looking for any spur in world milk production any time soon,” Cropp says.

USDA’s November milk production report, released this week, shows growing U.S. milk output. At 2.4%, the growth is on the high side but still within “normal” growth patterns, says Stephenson. The good news is cheese and butter stocks are being drawn down, indicating good domestic demand, and exports are picking up.

In October, U.S. exports accounted for 15.7% of domestic milk production, one of the highest levels in the past two years. “That’s pretty good,” says Cropp.

You can watch all of their comments in an 11-minute video here