March 30, 2018

Price Headwinds Ahead

 |  By: Mike North

When producers are in a depressed economy like we are in now, the number one question asked is “when will prices recover?” Unfortunately, the only answer is “that depends.” The response “that depends” references production. If production can slow down enough to let our inventories clear out, prices will likely rise. But, the likelihood of that happening is the real question. There is a lot of milk in the market, and it’s not just the U.S. Certainly U.S. dairy farmers continue to produce more and more milk, and USDA figures show continual 1% to 2% growth on a year-over-year basis. Cow numbers continue to rise as does milk per cow, so the production growth won’t end anytime soon.

Globally, production has dropped in New Zealand as dairy farmers suffer through another drought. That should have an impact on global production, but the EU has ratcheted up production since restrictions have been lifted. For every 1-lb. drop in production in New Zealand over the past few months, the EU adds 5 lb. of milk into the system.

More milk means more dairy products and greater inventories. Stocks of non-fat dry milk and skim milk powder are at or near record levels in the U.S. and in Europe. Cheese inventories continue to be robust, and butter stocks are rebounding after the holiday sell off. This leads us to a conversation about demand. Growing exports continue to add a sparkle of hope for our markets. However, while the U.S. has been the lowest cost global provider of product in the past year, inventories have continued to grow. This puts added stress on domestic consumption to do the heavy lifting, especially if milk supplies continue to grow. That is a challenge unto itself. This time of year, processors are generally working harder to build inventory rather than empty it.

So when will milk prices recover? There are strong headwinds as we go through the spring and into summer. Again, it depends. If demand picks up domestically and overseas and if inventories go down far enough and if we hold there long enough, cow numbers might start to retract and supply will slow down long enough to see prices recover going into the second half of 2018 and into 2019. Still, a lot of variables yield uncertainty.

Here’s how to create certainty:

  • Get help. Find a professional who can help guide your decision making processes as it relates to managing price risks and opportunities.
  • Be mindful of price rallies when they come and be realistic about what a rally looks like. Many times the mediocre prices that give us pause end up being more greatly appreciated as markets drift lower. Have a plan for current prices and when prices rally, and be prepared to act.
  • Know where breakevens are. Evaluate prices based on the margins they provide, not on where they have been. Draw down your cost of production.
  • Look at where you can reduce production costs without impacting the cash flow benefits of higher production.