February 12, 2019

Have Milk Prices Hit Bottom?

 |  By: Robin Schmahl

With the recent strength in cheese prices, there is a feeling milk prices may be on the rise. There is a feeling that cow numbers have been declining as farmers continue to exit the dairy business. It has not been confirmed that this is the case due to December Milk Production report not being released because of the government shutdown. There is hope this report will be released as scheduled on February 21st, but another shutdown in still a possibility before then. 

Some plants have expressed some concern that milk supply is tightening, but that may be plant specific as there are other reports that plants primarily in the western half of the country are running at or near capacity. The Midwest has reported a high number of farms that have exited the dairy business, yet the latest report indicated spot milk prices are running at class or as much as $2.00 below class. Spot prices have weakened slightly over the past week or so. 

So, it appears the bottom may be in for dairy prices. The proof will be when we see what cow numbers have been doing over the past two months. Herds have been liquidated which indicates eventual lower milk output. However, there continues to be reports of expansions that may have minimized the decline of cow numbers. One thing we do know is that for milk prices to trend higher, we will need to see reduced cow numbers and lower milk production or increasing demand which will draw-down inventory.

It does not look like milk prices will receive much help from international demand in the near-term. 

The November 2018 dairy export report shows export business is struggling. Dairy export in November declined below the previous year for the first time since October 2017. Declines were seen to many countries, and not just China due to tariffs. The volume of dairy products exported during the month was down 12% from a year earlier. The categories which showed significant declines were nonfat dry milk/skim milk powder (NDM/SMP), cheese, and whey. 

NDM/SMP exports have the largest volume of exports, but declined 13% for the month. Mexico remained a strong buyer, with more than half of the total 48,028 metric tons sold to that country. Sales to Asia fell 22%; Pakistan down 72%: Middle East/ South Africa (MENA) declined 91%; and China sales declined 64%. 

Whey is the second largest export commodity for dairy and posted a decline of 18%. Total whey exports to China declined 37% which was the fourth consecutive month of decline of whey sales to China. In fact, since tariffs have been put on China in July, whey sales are down 36%. This is likely the reason dry whey price has fallen dramatically on the daily spot market. Supply is backing up into the system. Sales to some other countries were lower as well for the month. 

Then there is cheese. Exports were down 10% with the lowest export volume in November in two years. Exports to South Korea fell 24%; Australia declined 45%; Mexico declined 7%; Japan was down 13%; MENA declined 20%; and China exports fell 25%. Fortunately these declines were partially offset by an increase of 43% in shipments to Central America. 

So to say milk prices have reached a bottom may be correct, but it may remain a struggle for prices to continue to trend higher. The hope is that milk prices will not get any worse than they already are. Slower exports and large inventory of cheese will continue to keep a lid on the market until we can improve exports and reduce inventory.