February 25, 2019

Tariff Resolution and Weather Trends Could Impact Prices in 2019

 |  By: Robin Schmahl

Unfortunately, there seems to be little change in the outlook for milk prices for the foreseeable future. Milk futures show higher prices into September which is usual from year to year. Historically, milk prices reach their peak in September or October and futures generally reflect that seasonality. It may not turn out that way, but it is a pattern anticipated each year. Whether prices achieve those levels is determined by what underlying cash prices do. The pattern we have been seeing for a period of time is the eroding of futures prices as contracts needed to converge to cash. We know this will change at some point, but that remains an unknown.

There have been many farms that have discontinued milking cows over the past year. Low milk prices have been around much too long and the loss of equity has taken its toll. There has been and will continue to be much blame put on various things for the current state of the dairy industry. It has been an exceptionally long period of low milk prices, but it has yet to bring milk production to a level below the previous year. 

The December Milk Production report showed milk production 0.5% above December 2017. This gain was not from cow numbers increasing as that showed a decline, but from increased milk production per cow. Production per cow was 21 pounds higher than a year ago. Most everyone is doing a very good job of getting the most out of the cows through better practices. 

During the fourth quarter of 2018, there were 15 states recording milk production increases for the same period of time in 2017. Of these states, there were 10 states which increased cow numbers to support the milk production gain. These states were: Colorado; Idaho; Kansas; Nevada; Oklahoma; Oregon; South Dakota; Texas; Utah; and Washington. There were 4 states which showed declines in cow numbers, but an increase in production. These were: California with production up 2.1%; Minnesota production increased 0.3%; New York production increased 1.5%; and Wisconsin with milk production up 0.5%. The state of Wyoming showed steady cow numbers while milk production increased 5.6%. Fourth quarter milk production gains in the top two states of California and Wisconsin made up for much of the decline in many other smaller dairy states. 

We are in a new year and there are many things that could impact milk production and milk prices as there are every year. This year may be a bit more challenging to anticipate milk prices. News from the progress of the tariff talks circulates the market daily. A settlement of the tariff war with China may provide a boost to agricultural markets in anticipation of renewed export business. However, it will take some time to regain the loss of business we have experienced and will not impact prices overnight.

There is some concern over the potential for delayed planting already surfacing. It is very wet in the South with the extended forecast calling for above normal precipitation for a while. This could start building some premium into the corn market. There is concern over stocks of good quality hay and the potential for hay supplies this year. The February 8th USDA Hay Stocks reported all hay stored on farms as of December 1, 2018 at 79.1 million tons. This was down 6% from a year earlier. These were the lowest hay stocks on December 1st since 2012 and the second lowest stocks since 1977. Of the top 12 states for hay production, 7 states showed declines of stocks from the previous year. 

A settlement of the export issues plaguing the market and/or a significant weather impact affecting hay production and the ability of harvesting good quality dairy hay may turn milk prices around and trend higher. Of course, the best price support would be strong demand both domestically and internationally. That would provide solid support for milk prices for the long-term.