Global oversupply of milk and heavy stocks of dairy products have sent farm-gate milk prices lower in most export regions by as much as 15 percent since the start of the year.
With peak milk-production season in the Northern Hemisphere looming, markets aren’t likely to rebalance until the second half of 2018, Rabobank analysts said in their latest dairy quarterly report.
Low on-farm margins are expected to slow year-on-year gains in global milk production, but milk-supply growth will continue to outstrip import demand through the second quarter, the analysts said.
Markets took $2.49 per hundredweight out of the U.S. price for Class III milk used to manufacture cheese in the first quarter of 2018 and are expected to take out 15 cents in the second quarter.
In the U.S., high stocks, sluggish fluid milk sales and milk-production growth — up 1.8 percent year over year in January and February — have exerted downward pressure on wholesale product prices, they said.
At the end of February, U.S. butter stocks were up 2.6 percent year over year, cheese stocks were up 7 percent and stocks of nonfat dry milk were up 50 percent.
“(Non-fat dry milk) stocks have accumulated — in part due to weaker exports to Mexico — as buyers have sought to diversify their suppliers by importing more NFDM from the EU and Canada,” the analysts said.
U.S. domestic demand remains fragmented, with retail sales of natural cheese and butter up 3 percent and 6 percent, respectively, in January and February versus a year earlier. But sales were down 2.7 percent for processed cheese, 4 percent for yogurt and 1 percent for both fluid milk and ice cream, the analysts said.
Foodservice dairy sales have helped, with quick-service restaurant sales up 5.5 percent and full-service restaurant sales up 2.7 percent.
Domestic demand should pick up, driven by U.S. economic expansion, which is anticipated to jump to 2.7 percent in 2018, compared with 2.3 percent growth in 2017.
On the global front, improved demand and favorable pricing have helped boost U.S. dairy exports, which were up 4 percent year over year in the last quarter of 2017 and continue to show growth.
Sufficient U.S. supplies and international premiums also slowed U.S. dairy imports, which were down 6 percent year over year in the fourth quarter of 2017, and that trend continues.
“Looking ahead, 2018 U.S. exports will remain competitive, with prices generally sitting below international levels and a persistently weak dollar,” the analysts said.
Continued weakness in milk prices and rising feed costs, however, are expected to curb production growth. Dairy cow slaughter in January and February was more than 5 percent higher than a year earlier, and more recent weekly data indicate a similar pace.
“Lower milk prices and narrowing farm margins are key factors contributing to greater culling,” the analysts said.
Milk production in 2017 was spurred by corn prices below $3.50 a bushel. But that’s unlikely to occur this year, as corn prices rise toward $4 a bushel through the second quarter.
Rabobank anticipates U.S. milk production growth will be slightly below trend in 2018, up 1.4 percent.
Source: Capital Press