November 22, 2017

When Will Milk Prices Recover?

 |  By: Jim Dickrell

Growing milk production worldwide and increased competition for export sales all point to a bleak, six-month forecast for milk prices, says University of Wisconsin dairy economists Bob Cropp and Mark Stephenson.

One example of the slump is Mexico, which is now sourcing some of its milk powder ingredients from the European Union (EU) and Canada. In the recent past, Mexico imported some 90% of its milk powder from the United States.

But with the EU sitting on mountains of powder in inventory, it has aggressively priced sales to Mexico. Canada is also up 10-fold in its dairy ingredient sales to Mexico with the creation of its Class 7 program, which subsidizes exports.  The result is that Mexico is now taking just 70% of its milk powder sales from the United States, says Cropp. Skim milk powder prices are down some 30%, and are now trading at 72¢/lb.

Partly as a result of this, U.S. dry whey inventories are now up more than double of what they were a year ago, with whey prices now at 30¢/lb, down from 50¢ in May.  (That’s coincidentally when Canada started its Class 7 program.) This drop of 40% in whey prices has lowered the Class III price by a $1/cwt, says Cropp.

“Unfortunately, we’re looking at another price drop over the next few months,” says Stephenson. He forecasts that the all-milk price will not reach $17 until next summer.

“If prices get as low as the futures markets show, I think that we’ll speed up culling of cows and affect production per cow,” says Cropp. “USDA is looking for a 1.8% increase in milk production next year. That’s a lot of milk, and I think there’s a chance that might not materialize.”

Stephenson notes that dairy milk-feed margins, as calculated by the Dairy Margin Protection Program, are dipping down to $8/cwt in the first quarter of 2018. He’s not predicting MPP payments of any substance next year, but it illustrates how far milk prices have fallen. The only saving grace are lower feed prices and a relatively good crop year in 2017.

If there is anything to be grateful for this Thanksgiving week, it’s that Class III prices will average about $16.50/cwt in 2017. That’s up from $14.84 in 2016.

View the entire podcast from Cropp and Stephenson here.

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