May 9, 2016

Have Low Prices Cured Lower Prices?

 |  By: Robin Schmahl

Well, the unthinkable has happened, or maybe it is best said that what we hoped would not happen has happened. Weakness of cheese prices have brought prices down to the levels last seen in March 2010. Most thought this was not possible as profitability is non-existent. Milk prices declining as much as they had in 2015 was hard enough to swallow, but current milk prices and the outlook for much of this year is enough to choke us. It seems inconceivable that milk prices could swing so drastically over the course of 1 1/2 years.

Yet there were a few factors that made this possible and likely set the stage for the future. Strong worldwide milk production began oversupplying the world market. Abolishing the quota system in the European Union at a time when Russia was no importing dairy products tipped the scale to oversupply. Now, I know the argument raised many times is that this does not seem possible due to population growth around the world. The statement, “People have got to eat” resonates at many of the meetings that I have been involved in. Yes, that statement is true, but we must remember to look at the larger picture and the working of supply and demand in the market. If the population is growing and the need for people to eat is keeping pace with supply, then prices would be supported and certainly higher than they are. Global markets are at work here with supply and demand not only confined to the shores of the U.S. or the shores of other countries. Product moves throughout the world more than it ever has. We are not competing only with out neighbor down the road, but our neighbor in all parts of the world. According to the Foreign Agricultural Service Office of Global Analysis, milk production in Argentina is forecast to increase 2% this year to 11.7 million metric tons. Australia is forecast to remain unchanged at 10.0 million metric tons; the EU-28 to be up 1% to 149.0 million metric tons; New Zealand to be down 3% at 20.7 million metric tons; and the U.S. to increase 2% to 96.3 million metric tons. Overall, milk production in the world is expected to increase 1% to 287.7 million metric tons.

The extended period of low world prices is impacting U.S. prices with the exception of butter. Butter price has enjoyed surprising demand and good support. One gets the feeling the axe may fall at some point due to the fact that world price on the last Global Dairy Trade auction was $1.18 compared to the U.S. price over $2.00. The good news is that butter exports have increased over last year with year-to-date exports up 29%. The bad news is that exports are running about one third of what they were in 2014. However, cheese is struggling with sellers desiring or maybe forced to move supply now rather than holding for a potential price increase later this year. Storage space is becoming a premium in some areas leaving the only alternative of moving product to the market. It is a buyer’s market right now. There is indication demand has increased to some extent with the recent decline of cheese prices. Demand needs to improve as the exports of cheese continue to decline. March cheese exports were down 26% with year-to-date exports down 18% from last year.

So, when will milk prices trend higher and how long it take? That is very difficult to assess. Price cycles in dairy historically ran on a 2 1/2 -3 year duration. However, with the globalization of dairy and worldwide movement of dairy products more than ever before, price cycles may be extended. It is possible price cycles could now run 4-5 years. We have not had enough history to establish a pattern. We do know that an increase of world prices will not be readily transferred to higher U.S. prices as contracted supplies at lower prices will need to be satisfied before buyers will look to find the best price. U.S. prices remained higher in 2014 while world prices declined due to this reason. Once our contracts ran out, buyers had already been purchasing and making contracts at lower prices. This resulted in the substantial declines experienced in exports in 2015 and so far in 2016. This cycle will eventually run its course and record milk prices will again return.

Upcoming reports:

-World Agricultural Supply and Demand report on May 10

-April Milk Production report on May 19

-April Livestock Slaughter report on May 19

-April Cold Storage report on May 23