Supply Slows While Demand Grows
There are many who believe that we got into this milk price mess because milk production ran too high without enough demand to support adequate prices. This would fit the normal economics formula that says when supply outpaces demand, milk prices drop.
Taking a look at the current global dairy economy, however, reveals the gap between supply and demand has closed somewhat through the first part of 2019.
From a supply standpoint, Mother Nature has helped. Poor weather in New Zealand, Australia and Argentina over the winter hurt production, and it looks like March and April production in those countries will lag behind 2018 production over the same period.
“With New Zealand and Australia basically knocked out for the rest of the season, we’ll need to see good growth in the European Union (EU) and okay growth in the U.S. to offset weakness elsewhere,” says Nate Donnay, director of dairy market insight with INTL FCStone. “A few weeks ago it was looking like EU production was on track for good growth, but the weekly milk collections in Germany and France have moderated a little in recent weeks.”
Expect USDA to adjust milk production reports, Donnay says, because the current data appears to be inconsistent. For example, USDA reports show cow numbers increasing from December through February, but Donnay says that doesn’t make sense because slaughter numbers indicate we are sending more cows off the farm than what can be replaced. Expect USDA to revise production numbers down when the quarterly report comes out, he adds.
As for global demand, global milk equivalent exports were up 9.4% over last year in January and up 8.8% in February. On an annual basis, Donnay says growth hasn’t been higher than 5.6% in recent years, so this fast pace isn’t likely sustainable long term. This growth was driven by the availability of cheap powder in the EU, and those cheap prices are mostly gone.
“I’m still forecasting second-quarter volume to be up about 4%, so it’s not like we’re looking at a collapse in demand but it won’t be nearly as strong as Q1,” Donnay says.
As usual, demand will be driven by what happens with China. Donnay is forecasting 7.5% growth for China for 2019, but their maximum sustainable import growth is about 25%, he says. If they were to hit that number, things would get interesting.
In order to meet that demand, China would have to buy about 2.6 billion pounds of milk from a variety of buyers to reach that 25% level, and would have to push prices up about 33% to make it happen, Donnay says. That would take milk from $16 per cwt to about $21 per cwt, he says.
In the big picture, Donnay says global economic issues will have more impact on demand than a sudden spending spree by China. The global economy is slowing down, in general, with the possibility of the negative impacts of U.S. trade wars with China and Mexico.
“Right now I think positive resolutions of trade tensions and a softish Brexit keeps the outlook from getting worse,” Donnay says. “But I’m not sure if they could shift the economic outlook higher by themselves.”
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