If you’re a dairy producer reading commentary from economists forecasting milk prices into 2018, you’ve probably added a little more rum to your holiday egg nog. Of course, if you’re in the dairy business, a common reaction might be “here we go again.”
Looking into 2018, there’s a common reoccurring theme: too much milk and not enough room for it. In a nutshell, that’s what’s driving the milk price dive. “Milk production is too strong and there is too much dairy product in inventory, especially milk proteins,” says Mark Stephenson, a dairy economist at the University of Wisconsin.
Production and inventories aren’t just an issue here in the States – they are global problems. While butter may be in short supply in France and other parts of the European Union, there’s more powder and other products in storage than we literally know what to do with. And as production continues to grow, albeit at a slower rate, those inventories won’t clear out until prices entice a sell off.
Most economists look at 2018 as a tale of two halves. Milk prices are projected to bottom out in the first half in the high $13’s to mid $14’s. But prices are expected to rise in the second half of the year as production and inventories reach a more equitable balance. Bob Cropp, Stephenson’s counterpart at the University of Wisconsin, says prices could reach over $16 per cwt in 2018, for an average around $15.20.
Even as producers look toward a gloomy early 2018 forecast, there are a few silver linings that could help keep prices from totally reaching historic lows:
China. While U.S. exports to other regions of the world are off compared to 2017, China keeps on buying. “China’s imports in 2018 of dairy products will continue to grow, albeit at a slower pace of 8% year-over-year,” says Dan Basse, president of Ag Resource Company based in Chicago, Ill.
U.S. economy. While the ag economy, and dairy in particular, continues to struggle, the general U.S. economy is strong and gaining steam. This is good for dairy, says Nick Buyse, risk management consultant with INTL FCStone. “US annual economic growth is approaching 3.5% in 2017 with no signs of that rate slowing in 2018,” says Buyse. “In boom economic years, on-farm income also booms. This may mean stronger commodity prices – including milk prices – than are expected in 2018.
Just as U.S. dairy producers have come to expect price fluctuations, price uncertainty is also a common theme. Since production, capacity and demand together create a tenuous equilibrium, a change in one area creates reactions in another. The largest potential wrench in the system going into 2018 continues to be exports.
As the health of the U.S. export market goes, so goes U.S. milk prices. Export health rides on a few factors:
Our customers. Mexico, Southeast Asia and Canada are our top three customers. Any change in buying patterns of these three has a significant impact on sales of U.S. products. “Clearly the gigantic question on the table is Mexico,” says Andrew Novakovic, an economist at Cornell University. “In this regard it’s not so much a question of whether Mexico will be buying dairy products but rather who will they be buying them from.” Already this year U.S. market share in milk powder sold to Mexico has gone down as our southern neighbors look to diversify their dairy supply partners.
NAFTA. It’s understood by anyone in agriculture that exports are important, which makes the negotiations around the North American Free Trade Agreement (NAFTA) all that more critical. Whether that agreement lasts or not, the relationship between the U.S. and two of our top three trading partners is important to maintain healthy export markets. While President Trump continues to threaten to back out of the agreement, remember that doing so may not have immediate ramifications. First, there’s a 12-month cooling off period that will allow all sides to continue negotiations. Also, any decision to back out of NAFTA will need to come with Congressional approval.
Our competitors. The EU and New Zealand continue to be the largest competitors to the U.S. on the global market. Both countries are facing similar production, capacity and demand issues that U.S. producers face. “I’m keeping a watchful eye on EU milk production, policy on supporting dairy producers should prices become untenable and how it handles intervention stocks,” says Sara Dorland, a market analyst with the Daily Dairy Report. Weather issues continue to plague pastures in New Zealand, impacting production.
Even with low milk prices, thankfully feed costs should remain relatively low as well. Basse says that feed prices, at least corn and soybean meal, should remain flat at least into summer. He expects corn prices to range from $3.30 to $3.75/bu into spring. Soybean meal will range from $305 to $350/ton into mid-year, he says. The kicker is non-feed costs, and especially labor expenses, that continue to grow and compete with feed costs for the greatest impact on costs of production. Expect those costs to continue to rise.
So looking into 2018, producers will need to tread water in the first half of the year and anticipate at least some price relief going into the second half. As usual, any changes to production or global markets could change everything, so be ready to make risk management changes as markets react to changing dynamics.
Source: AgWeb