March 27, 2019

Slowing Global Output Collides with Declining SMP Stocks

 |  By: Fran Howard

A slowdown in global milk production has collided with the near depletion of global milk powder inventories, and that bodes well for future milk prices both here and globally. “In the past, depletion of government-held stocks has been followed by periods of higher prices to encourage milk supply expansion,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

“If milk supplies in the United States and Europe hover near unchanged, and the focus continues to be on cheese production, nonfat dry milk and skim milk production could continue to decline this year, creating a reasonable expectation that global stockpiles of milk powders could be depleted to offset milk production shortfalls,” Dorland says.

At the current rate of reduction in Intervention stocks, Dorland says EU stockpiles could be depleted soon—about the time that spring flush is starting in the Northern Hemisphere. “While there are several geo-political events that could significantly revise expectations for higher milk prices, it has been nearly four years since global dairy market analysts have contemplated a future without sizeable government stocks of skim milk powder,” she says.

Last year, both the United States and Europe produced less nonfat dry milk (NDM) and skim milk powder (SMP) than they did in 2017. The United States produced a total of 2.3 billion pounds of NDM/SMP, down 3.2% compared to 2017 levels, and the EU-28 produced 3.5 billion pounds of SMP, or 1.5% less than in 2017. Combined, EU and U.S. production created a year-over-year deficit of 136 million pounds of SMP/NFM in 2018. “That large of a deficit begins to explain the rapid reduction in EU Intervention stockpiles that began late last year and has continued into this year,” Dorland notes.

In 2018, 445 million pounds of SMP was sold from EU Intervention stocks, leaving 287 million pounds unsold as of Dec. 31, 2018, Dorland notes. In January, an additional 158 million pounds left government storage for private holdings. “Lower output and higher demand for skim milk powder could have accounted for the drawdown in Intervention stocks,” she adds. “China’s record-setting SMP imports in January alone could equates to 17% of the Intervention SMP that moved out of government storage in January.”

Global milk production has continued to slow since then, which could mean even less milk has been headed to milk driers. In January, year-over-year contraction in Europe, Australia, and South America more than offset modest growth in U.S. milk output and gains in New Zealand. European milk collections in January dropped 1.25% from 2018 volumes. Production gains have also recently slowed in New Zealand and the United States. Dry weather in New Zealand cut February milk collections to 4.1 billion pounds, up just 0.1% from the prior year. On a milk-solids basis, New Zealand’s year-over-year output slipped 0.1%. In the United States, year-over-year milk production in February slipped to a 0.2% gain as cow numbers tumbled 77,000 head.

While milk is still plentiful, the slowdown in global output is helping to chip away at global surpluses, she adds.

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