May 28, 2018

Turn Down the Pressure

 |  By: Aga Dobrowolsk…

The U.S. posted another record year for milk production in 2017 with total output exceeding 215 billion pounds, according to USDA data. The year-over-year growth in milk production (adjusted for 2016 Leap Day) was 1.7% in 2017. Despite farmgate prices hover- ing just barely above break-even costs, production in the first quarter of 2018 was up 1.5% year over year and right on the historical compound annual growth rate (CAGR) of 1.5%. As of March 2018, the U.S. dairy herd stands at 9.406 million head, down 2,000 head from the prior month but 23,000 head more than March 2017. Dairy cow slaughter for Q1 2018 totaled 837,300 head, up 5.5% over last year. In March, butter stocks increased a modest 0.4% year-on-year, while total cheese stocks were up 5%. However, March-ending stocks of American cheese, were 0.4% lower than March 2017, down 3.4 million pounds. Non-American cheese stocks, primarily Italian cheeses, were slightly above February’s level and 14% year over year, or 65.8 million pounds.

The EU increased production too. In the EU, the 28 member countries also reported greater year-over-year milk production, with output totaling 340 billion pounds, up 2.1% from 2016. The EU started 2018 on a high note with a year-over-year increase above 3% for the first two months of the year. Six out of the seven leading EU milk-producing countries posted year-over-year gains. The EU intervention stocks of skim milk powder (SMP) continue to weigh heavily on the SMP and whey markets. However, the EU Commission sold a little over 24,000 metric tons of SMP as a result of its April 17 tender. That is more than twice the total amount sold out of intervention over the past two years. The Commission accepted bids equal to 63¢ to $1.02 per pound. In an effort to not accumulate any additional stocks, the European Commission has not accepted any SMP tenders since the program opened in March.

Strong exports are balancing supply growth. The anticipation of dairy commodity prices reaching new lows, causing even lower farmgate prices during the second quarter of 2018 was slightly alleviated by lower-than- expected New Zealand production. Unfavorable weather conditions have severely impacted pasture quality in the region, reducing milk production. Robust global dairy exports during the first quarter of 2018 suggest demand remains strong. According to February data, total U.S. exports got off to a good start with volume up 15% compared to last year. Despite continual weakness in dairy commodity prices, the year-to-date value of U.S. dairy exports increased by 3%, even with more of the Mexican market going to EU suppliers.

The outlook is neutral. Even with strong dairy demand, Rabobank expects price appreciation to be limited due to continuing year-over-year growth— driven by the EU and the U.S.—in the global milk supply. Although U.S. exports reached a new high in the past months (in spite of trade issues), lower farmgate prices through the first half of 2018 are expected to reduce the U.S. dairy herd. This could support milk prices during the second half of the year, matching 2017’s prices but remaining lower than the five-year average.