Woman buying milk.
March 29, 2018

‘The Worst Is Behind Us’

 |  By: Jim Dickrell

Sarina Sharp, a livestock and feed market analyst with the Daily Dairy Report, believes better times in dairy country are ahead.

“We have hit the low and the worst is behind us. Futures [prices] are projecting that,” she says. “The biggest factor that $13 milk and $3.75 corn doesn’t feel better is because premiums are lower. Processing capacity issues are coming home to roost.”

Sharp spoke this week at the Central Plain Dairy Expo here in Sioux Falls, S.D. In addition to lower premiums, she notes that farmers are getting squeezed by higher labor costs, the loss of the use of rBST (which she says was adding 40¢/cwt to margins in herds using it), lower calf and cull cow prices and rising feed prices. On top of that, the futures markets offered few pricing opportunities to lock in profits over the past year, though hedging could have reduced losses.

To illustrate lower non-milk revenues, she estimates a 1,000-cow herd will realize only about $487,000 dollars in cull cow revenue this year compared to nearly $620,000 in 2015. That same herd will only see about $47,000 in bull calf sales this year compared to $183,000 in 2015.

In terms of global supply, Europe is currently sitting on a mountain of skim milk powder which is keeping a lid on powder prices worldwide. Plus, U.S. stocks of nonfat dry milk are growing. And, Canada is increasing its milk production and is exporting milk powder to Algeria and Mexico at low, subsidized prices, competing for U.S. market share in those countries.

On the positive side, China has announced it expects to see dairy usage increase 50% in the next decade. “That’s a big jump,” she says. By 2021, China’s dairy consumption is expected to equal that of the United States. And while China prefers milk powder from New Zealand because of quality and long-standing relationships, that increasing demand could allow the United States to backfill orders New Zealand can’t accommodate as it feeds China. Consequently, China’s increasing dairy consumption is a win for everyone.

Short-term, low prices are best cured by low prices…eventually, she says. It’s starting to happen as weekly cull cow slaughter numbers slowing ramp up. “We won’t be able to really see meaningful price recovery until we see U.S. cow numbers decline,” she says.

“The bad new is—the first half of the year was rough, but the second half will be better. The timing may be a bit later than we expected—the recovery may not come until the fourth quarter rather than July 1.”

But she adds: “This market has all the bad news priced in. If we’re going to have a surprise, it’s on the upside. We will get there, and Chinese demand could help considerably.”