Is The Market Bullish or Bearish?
The dairy industry is dealing with conflicting market fundamentals. On one hand, fundamentals are somewhat bearish as milk production grows, cow numbers rise, inventories increase, and processing plants push capacity leaving little or no room for expansion or production growth. On the other hand, continued farm liquidations, increased culling, and an extended period of low milk prices may eventually tighten milk supply. Domestic demand continues to hold well and increase with export growth doing very well. Thus, there are many milk price views, ideas and forecasts for the rest of the year.
Let’s break these apart and discuss each of these.
The fact that milk production continues to grow is just part of the dairy business. Historically, farms have increased production and expanded during periods of low milk prices. This is done for various reasons which could include bringing another family member into the operation. It could be the opportunity to purchase another farm. It could be in the 5-year or 10-year plan of the farm. Generally, lower prices move in cycles and do not last for an extended period of time. It is different this year as it is the third year of low milk prices which makes expansions or improvements very difficult. Yet, there are still those who are increasing milk production for the reasons stated above.
The other issue being faced currently is plant capacity. Farms need the O.K. from processing facilities before increasing milk production. However, as some farms exit the business, other farms are assuming their space at the processing plant. There have been reports of farms contacting other farms offering to purchase their “unofficial quota” at the processing facility creating a new phenomenon for the industry. I have not been able to confirm such a transaction has taken place, but it does put an interesting dynamic in the market.
Strong milk output continues to move to manufacturing as fluid milk demand remains flat to lower. The result is increasing dairy product production as seen on the February USDA Dairy Products report. Demand is strong and increasing, but inventories continue to grow indicating more is being produced than consumed. Many processing facilities are running near or at capacity with spring flush in varying stages depending on location.
Farms are exiting the business, but this has had little noticeable impact as of yet. If this continues, it will eventually result in cow numbers declining. However, it always takes a period of time before this will be evident. Continued low milk prices will eventually reach a point at which expansion will not take place.
Domestic demand continues to hold and increase, not for fluid milk, but for other dairy products. International demand continues to grow with February exports reaching a record high with 181,797 tons exported during the month. Cheese exports reached the highest level in eight months increasing 7% from February 2017. China increased their buying of cheese by 100% compared to a year ago. Butterfat exports increased 21%. Nonfat dry milk/skim milk powder exports increased 28% with dry whey exports up 7% from the year before. This certainly is good news that we hope continues. We can only hope China does not list dairy as a category on the tariff list as they are a large buyer of lactose, cheese, and dry whey.
Thus, the confusion of market direction continues and will continue for the rest of this year. We know this will all work itself out, but it is unclear how long it will take and how much the industry will change before it is all said and done.