Will 2018 be a Recovery Year?
If 2017 was a year in which the dairy bears triumphed over the bulls, will 2018 allow the bears to gain even more ground or will it be a year dairy bulls stage a slow but sustained recovery?
“Last year was a raucous year in the dairy markets. The bulls asserted themselves at times, but the bears ultimately triumphed,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “Hopefully, low dairy product prices in early 2018 will boost demand, helping to chip away at today’s abundant dairy product inventories. This will take time, but it could set the stage for a sustainable dairy market recovery later in the year.”
On the final day of trading in 2017, all of the major dairy product prices were lower than they were on last trading day of 2016, but butter prices fared better than the rest. On December 29, 2017, CME spot butter prices at nearly $2.21/lb. were only 2.6% lower than the previous year.
“In 2015 and 2016, the U.S. butter market commanded an unusually stiff premium relative to European product, but the situation reversed in 2017 when the European butter market soared to unprecedented heights,” Sharp says. “European butter peaked in September but has since plunged, bringing global butter markets into a rare state of convergence.”
Demand for butter continues to grow worldwide and production is struggling to keep pace. While that’s good news for the butter prices, butter makers are having trouble finding a good use for their left over skim solids, which in most cases will be headed into nonfat dry milk (NDM) or skim milk powder—products in oversupply worldwide.
At the end of October 2017, U.S. manufacturers were holding 46.5% more NDM than they had the year before, according to USDA data. Europe was also sitting on a mountain of skim milk powder (SMP). Europe, however, slowed its Intervention purchases in 2017 to only 30,647 metric tons, according to Eurostat. “That's less than 10% of the volumes purchased in 2016 but it’s still a step in the wrong direction because the government only sold 220 metric tons out of Intervention storage,” Sharp says.
NDM and SMP prices have also plunged. SMP prices at the Global Dairy Trade auction sank 36% in 2017, while CME spot NDM prices plummeted more than 34%.
World cheese supplies are also ample, but cheese’s co-product whey is now in excess supply, Sharp notes. U.S. December whey futures settled 24.7% lower on the last day of 2017 than on the same day the previous year. Meanwhile, CME spot block prices dropped 7% in 2017, while barrel prices fell nearly 10%.
“With prices so low on so many of the major dairy products, it’s easy to believe that demand will pick up, leading to a slow worldwide recovery,” Sharp says. “At the same time, though, milk production continues to grow despite lower prices, which means even more product will enter the pipeline.”