June 20, 2017

Prices Staying Ahead of Production

 |  By: Mike Opperman

Milk production continues to climb in the U.S., and areas around the globe are starting to recover from adverse weather and other actions that have impacted productivity. Global farm gate margins are generally positive, which should continue to drive higher production levels.

So far, the U.S. and global markets have been able to soak up the extra production. “We have been producing more than we are consuming domestically, and we’ve been putting surplus into inventory,” says Nate Donnay, director of dairy market insight with FCStone. “It looks like we are going to get the chance to clear some of that onto the world market over the next couple of months. U.S. dairy prices are competitive with a lot of major exporters and we continue to see exports improve.”

Donnay says the unsung hero in the demand picture is China. “China hasn’t gotten the credit they deserve for driving global demand in the last 12 months,” Donnay says. “It hasn’t been spectacular growth, but if you subtract China out of global imports, demand has been basically flat. China has been contributing all marginal growth on the demand side.”

Looking at supply as it relates to demand opportunities, long term Donnay sees prices staying flat if not down a bit. “This doesn’t look like the start of another big cycle like we saw in 2013 – 2014,” Donnay says. “Demand looks good enough to absorb the 2% to 2.5% production growth globally but it doesn’t look a whole lot better than that.”

Short term outlook is a little more bullish. “Production in France and Germany hasn’t been what we have expected,” Donnay says. “We thought that they would recover from the cool spring with the recent rain and warmer weather, but it hasn’t picked up.” That’s helping support the market short term.

Of course, weather could change everything. Hot, dry weather in the U.S. that curbs production and hurts feed inventories, or adverse weather events in New Zealand that impacts production, could support our current prices. “Without some sort of weather event or outside force that holds back milk supply it gets hard to see current prices being sustainable into the third and fourth quarters.”