September 29, 2016

Price Improvement Continues

 |  By: Tom Bailey

In my last article, back in June, I noted that the news on the horizon was not all bad and the global dairy market would continue to improve. Across the globe this has been the case. We have seen significant supply contraction leading to a more positive overall picture.

Throughout Q3 2016, six of the seven global supply engines have applied the proverbial brakes to production. The EU saw milk supply decline 1.3% in July due to low milk prices and unfavorable summer weather. The three big players in Latin America have also seen a contraction of milk supply—Argentina and Uruguay were both down more than 10% in Q2. This is due in part to low milk prices and flooding earlier in the year, which hurt cow numbers and increased regional grain costs. Brazilian milk supply has also been contracting due to low margins.

Oceania milk suppliers have also applied the brakes due to the very low price environment which drove aggressive culling earlier in the year. Recent price increases in the Oceania region will not be realized until late in the first half of 2017, so we believe their milk supply will remain lower for months to come.

The U.S. has remained an exception to global trends, with milk supply continuing to grow (up 1.9% in August). The vast majority of the country has enjoyed favorable weather conditions through the summer, supporting cow health and low feed prices. Unfortunately, U.S. butter and cheese prices have been taking a beating recently due to exceptionally high inventories and continued production growth. However, with international powder prices now on the rise, U.S. farmgate milk prices have improved.

If the improving global dairy market wasn’t enough to help build farmer confidence, then the recent announcement the USDA would buy $20 million worth of cheese should be. The immediate impact of this purchase won’t be too helpful for prices ($20 million only buys around 5,000 MT of cheese and the U.S. produces more than 5 million MT annually). The precedent being set is significant. The U.S. government is reverting to interventionary methods to support the dairy industry. This policy will bolster U.S. dairy farmer confidence and should create a little more security for farmers.

Global demand for dairy has continued to grow fairly well, despite weak growth from oil-dependent markets. In Asia, demand has chugged along nicely. Recently, China made a longawaited return to the market.

U.S. demand for dairy products continues to improve. Natural cheese demand grew by 5% in August, and butter demand has also continued to do well. Fluid milk demand is still declining, but at a lower rate (-1.7%) with whole fat milk growing by 4%.

As a result of contracting global supply, the removal of 4 million MT of product from the EU via intervention and continued global demand growth, the global dairy market has tightened up significantly from six months ago. As a result, international prices have moved nearly 25% higher. However, U.S. butter and cheese prices still face headwinds.

Overall, the global dairy market is looking much healthier than 12 months ago. We expect things will slowly continue to improve in the near term as producers around the world struggle to turn production back on and demand continues to work its way through stocks.