Can milk prices escape?
Monday, December 3, 2018
Posted by: Lauren Brey
By Mike North, president, Commodity Risk Management Group
For several consecutive years, stagnant milk prices together with declining milk premiums and rising overhead costs have bled equity from dairy farms. To say that these conditions have worn on Midwestern dairy farmers is an understatement. In such times, their hope turns to improving milk prices as the savior from any continuation of current circumstances. But is that hope realistic in the near term?
Several factors will play into this discussion:
- Milk production (both aggregate and per cow)
- Size of the milking herd
- Feed costs and availability
- Inventories of dairy products
- Customer demand
- Exports of dairy products
- Trade deals and negotiations
Bear in mind that these elements will be monitored on both a domestic and global level.
So how do we stack up? First, milk production has continued to grow. This is true in the U.S. as much as it is the rest of the world. Even after the United States Department of Agriculture (USDA) removed 37,000 cows from the most recent reporting of the U.S. herd, year-over-year increases in production continued a five-year trend.
Among other top milk production regions around the world, an increase in total milk deliveries is also being observed. A drought that gripped northern Europe this summer has marginalized feed quality and holds the potential of reducing milk production in key countries like France and Germany. However, overall growth is still projected when considering other fast-growing nations like Ireland.
Feed remains plentiful elsewhere. In fact, the recent World Agricultural Supply and Demand Estimates (WASDE) report issued by the USDA shows U.S. soybean inventories at an all-time record level, just under 1 billion bushels, and 70 percent greater than the last record. Corn inventories slipped domestically while world inventories doubled after an adjustment of large proportion to Chinese balance sheets. Given the incredible start to South American planting and their projections of near-record harvests, the world will have plenty of feed inventory for the coming year.
Speaking of inventory, U.S. supplies of dairy product remain plentiful. Butter stocks were reported at a month of September high at 283 million lbs. Cheese inventories grew in September (a time when inventories are typically in decline) to a level of 1.37 billion lbs. The good news is that other protein products have declined in the last year. Whey and skim milk powder (SMP), to name a couple, have continued to reduce inventory as larger demand works on our stockpile.
That demand has shown up both domestically and globally. Protein products continue to be the category leaders for U.S. dairy product exports. As the U.S.-Mexico-Canada Agreement (USMCA) works toward implementation, ongoing business with Mexico will be helpful in extending this trend. However, business to China may be compromised both by struggling trade relations and the outbreak of African Swine Fever which has caused lower demand for U.S. whey, a staple in hog rations.
Collectively, this set of fundamentals is largely the same as it was last year at this time when we were preparing for 2018. The only addition is the advent of steel tariffs that thrust us into trade negotiations and other retaliatory tariffs with key trading partners. That said, our outlook remains very similar to last year. In fact, a quick glance at milk futures prices reveals a very close tracking both in time and price to last year’s market. A quick glance at an overlay of March 2018 Class III vs. March 2019 Class III milk reveals some haunting similarities. (See chart.)
Thus far, prices have remained on a very similar path to last year. While farm finances have continued to tighten, changes in the overall fundamental picture have not been realized by market participants. There is an old saying that says “If nothing changes, nothing changes.” Given all that is being observed, it seems 2019 is setting up very much like 2018 with no near-term escape from that path. That said, price risk management solutions are still widely recommended.