October 11, 2018

A Bright Future for Dairy Exports

 |  By: Robin Schmahl

Milk price has been following a historical seasonal trend which results in the high prices for the year taking place in September or October before prices begin to trend lower. Of course, there have been years during which higher prices were realized at other times of the year due to various changes of market fundamentals. This year seems to be following the seasonal pattern. The Class III milk price reached its highest level for the year in September with a $16.09 price. In fact, it is the highest price since November 2017. Class IV posted the second highest price of the year at $14.81 with the highest price being a dime higher in June.

The new Dairy Revenue Protection insurance opened October 9th allowing dairy farmers to protect milk or component revenue. This will allow the setting of a floor price while allowing for higher prices if they were to develop. The general feeling is that most farmers will wait and see how pricing will be set and changed on a daily basis as well as what is being offered per each of the five insurance periods. I recommend giving it time before making a decision. There is no deadline for signing up for the insurance. It can be done at any time, but an application must be signed before an endorsement can be established.

It certainly is good to see milk prices increasing, but it is a far cry from the average we had last year for the same period of time. The average Class III price for the first nine months of 2017 was $16.12 compared to the average this year of $14.62. The average Class IV price last year for the first nine months was $15.51 compared to the average this year of $13.95. It is highly unlikely that this difference will be made up during the last three months of this year. Traders and current futures contracts are not very optimistic about higher prices through the end of the year. The political uncertainty with tariffs and the impact on exports has had an impact on prices.

The USMCA trade agreement replacing the former NAFTA agreement between the U.S., Mexico, and Canada is a good step in the right direction. This will assure continued strong trade between the countries. The anticipated support to the dairy complex did not materialize except for the day after the agreement was reached. Since then, prices have been struggling with the exception of dry whey which continues to make new highs on the spot market.

Just because a trade agreement is reached does not mean a surge in export business. It takes some time to turn that ship around. The same will be true whenever the trade war is settled with China. Despite the trade issues that have been ongoing over the past months, overall exports continue to fair well. We can see that tariffs have had an impact on certain products as cheese shipments to Mexico declined 21% while sales for China and Canada were both down about 40% from August 2017. Whey exports to China were 26% below the previous year showing a definite impact from tariffs.

However, despite these declines. U.S. exports performed very well in August. The total volume of dairy exports increased 12% over the previous year reaching a volume of nearly 190,000 metric tons of product. Overall volume of exports for the first 8 months of this year are 17% above the same period last year. Even though some dairy exports to Mexico were below last year, they imports 36,059 metric tons of nonfat dry milk/skim milk powder which was an increase of 64% over August 2017. Other countries stepped up and increased imports making up for much of the losses with these countries. Although it is unfortunate that we have experienced these declines in business, there should be some optimism over the fact once the political issues are settled, the outlook is bright for export business.