Trade War Had Significant Impact on U.S. Exports to China
Correction: In my previous article, “Stronger Milk Prices Predicted” I made an error in reporting that Canadian Dairy processor, Saputo, is not accepting raw milk from Dairy Farmers of America (DFA) due to their failure to supply contracted milk to Saputo last year. That statement, which I received from another source, is not correct. Saputo did change their suppliers at some plants, but DFA continue to serve Saputo at some facilities.
Milk futures have been under severe pressure over the past month with Class III futures contracts declining around $1.00 per cwt. Although prices are still substantially better than a year ago, the high milk prices of November and December are clearly in the rear view mirror. The current trend of higher milk production continues. The many farms that have exited the dairy business have had little impact on the overall market. Yes, we did see some great prices at the end of 2019, but it was not because of milk production declining below the previous year. It was the result of strong demand that kept American cheese inventory from building in 2019. Overall, milk production was higher in 2019 than 2018 and the January Milk Production report showed strong milk output to begin this year with an increase of 0.9% above January 2019.
Even though there have been many dairy farms selling out, cow numbers remain strong. We can see a significant shift in demographics in the dairy industry over the past five years. More than 94% of dairy cattle now reside in one of the top 24 production states. Just over 51% of all U.S. dairy cattle are located in the top five production states of California, Texas, Wisconsin, Idaho and New York. Farms that have ceased producing milk have been more than made up for by those that want to produce milk. Some farms are actively looking to purchase plant quota from other farms or to assume plant space when a farm discontinues supplying milk.
There is no doubt the U.S./China trade war has had an impact on dairy exports. China has not been a large importer of cheese, but has been a large importer of powder with whey being the largest dairy commodity. Now keep in mind, a significant part of the reason for the decline of whey exports to China has been due to African swing fever and its impact on the hog herd in the country. Whey was used as a feed ingredient in the hog ration Whey imports into China declined substantially as a large percentage of their hog herd was eliminated. In December, whey exports to China, the largest export market for U.S. whey, was half of what is was in December 2018. When we take a look at the whole of 2019, the picture is somewhat bleak overall. Exports to China were significantly lower during the first ten months of 2019. However, imports of dairy products from the U.S. began to increase in November and December. Overall for the year, exports to China fell 37.7% compared to 2018. Of the top 10 exporting countries of dairy products to the China, two posted an overall decrease for the year. The other country that showed a decrease of exports to China was Uruguay with a decrease of 2.1%. It is unclear how much impact the coronavirus will have on imports in the near-term. Any backup of supplies due to reduced exports or even the delay of exports due to more safety protocols may have a significant impact on prices.