Because of very low farmgate margins, economic uncertainties, and potential political conflicts that would disrupt the flow of oil, the dairy sector around the world is not in an expansion mode.
That was the assessment of two executives of the United States Dairy Export Council (USDEC) during the organization's annual global dairy outlook during a Dec. 4 webinar that was sponsored by Dairy Foods magazine.
USDEC vice-presidents Marc Beck and Alan Levitt had a webinar audience of more than 680 registrants in 45 countries.
With milk production relatively flat in the world's five main dairy commodity export sourcing regions, which consist of the United States, the European Union (EU), New Zealand, Australia, and Argentina, there's very likely to be a squeeze on the supply of milk powder, Beck and Levitt indicated.
Whether that would translate into milk prices high enough to encourage the dairy sector to increase production is uncertain, they stated.
Levitt, who joined the council fulltime in March of 2012 as a vice-president for communications and market analysis, observed that the world dairy industry is expecting a bit of a product shortage for at least part of 2013 but that at the moment the market appears to be satisfied.
He noted that buyers have stocked up on supplies to cover approximately the first quarter of 2013, contributing to a record high all-milk price in the United States for November.
Price of whole milk powder
With the milk production flush having passed its annual peak in Oceania (New Zealand and Australia), Levitt focused on the price of whole milk powder, which is up from three years ago but still in a moderate price zone.
He pointed out that New Zealand's price usually runs at 10 to 15 percent lower than that in the European Union, which is now virtually on a par with the United States on the price for milk powder.
That farmgate milk prices or margins are hurting around the world is indicated by the periodic street protests by dairy farmers in Europe, New Zealand's 14-percent cutback on payments to milk producers, and the combination of high inflation and floods in Argentina, Levitt stated.
In the United States, he added, two-thirds of the country is still in a drought status although that topic has faded from the headlines in recent months.
Levitt also cited the continuing fall in cow numbers in California, Arizona, New Mexico, and Texas in recent months and the uncertainty about corn stocks and prices heading into the 2013 crop year.
He noted that milk production in the United States has been trending downward since June and predicted that milk production for 2013 would probably be down for the first part of the year and possibly increase by .5 percent for all of 2013 compared to 2012.
The fallout of this will be felt most noticeably on whole milk powder because the United States does not have a buffer supply in storage, Levitt remarked.
He said production is down 15 percent for the year, that the inventory is down by 55,000 tons since April, and that the year-end reserve is likely to be less than 100,000 tons.
Although the whole milk powder price has been running at close to $3,500 per ton recently, the upcoming price outlook is in a range of $3,800 to $4,200 per ton or the equivalent of a milk price of about $19 per hundred, Levitt indicated.
He predicted that the world market will need products made from milk produced in the United States and will be willing to pay for them.
Levitt thinks the bottom has been reached in recent days on the price for cheese and butter and that the price slump is due to "the market being overbought."
For 2013, he expects price volatility and believes the year's milk price will average above the current prices available in the futures market and for options.
the export market
Beck, an executive vice-president of strategies and insights who has been with USDEC since 1997, commented that political and economic risks in both the United States and the European Union are among the elements that are deterring the likelihood of expansion in the dairy industry.
On a positive note, Beck detects an apparently accelerating economy in China, which would carry over to other markets in Southeast Asia.
Levitt noted that about 16 million babies are being born in China per year and that the size of the country's middle class continues to increase.
China is hoping to import a lot of skim milk powder, Levitt stated. "It can import it cheaper than it would cost to produce it."
Except for possibly in Ireland, Levitt does not believe that countries in Europe have overbuilt on production facilities for milk powder.
He said a more important consideration is whether the farmgate price for milk will be high enough to spur an increase in milk production. For Ireland, he pointed out, the challenge will be to obtain enough domestic milk production.
Similarly, Levitt said the price of milk powder needs to increase in order to encourage more production of milk powders. He expects prices of between $1.50 and $1.80 per pound in 2013.
With anticipated cutbacks in exports 5 percent by New Zealand and 10 percent by Argentina, Beck sees the possibility of a world shortage of between 44,000 and 110,000 metric tons of skim milk powder during 2013 and of a price rise to about $3,900 per ton.
Cheese and butter supplies appear to be balanced on the world stage with only a slight likelihood of any shortages and with top international prices of $4,400 and $4,000 per ton respectively in 2013, he stated.
Within the United States in 2013, the dairy industry will have to decide whether to serve the export or domestic market if supplies are tight, Beck pointed out.
He said the decision will be made according to what products command the best market price - a scenario in which "the international could drive the U.S. prices more than the domestic market would."
Levitt noted that, on a milk solids basis, 13.6 percent of the U.S. milk production is being exported in 2012.
In the world market, skim milk powder will be out of balance during 2013, Beck indicated.
He predicted that prices will rise for exported dairy products and is confident that buyers in Southeast Asia will be willing to pay higher prices for some dairy products than suppliers would be able to get for them in the United States.
Looking to the scheduled expiration of the European Union's milk production quotas in 2015, Beck said this would make the EU more competitive in the world market because it would have more product to export. "That will be a challenge for the United States," Levitt commented.
Regarding particular countries, Beck emphasized the importance to the U.S. of maintaining its milk powder sales to Mexico, which accounts for about a quarter of the U.S. exports of the product.
Mexico is virtually an extension of the U.S. domestic market but the Pacific Rim, the Middle East, and North Africa are also important export outlets, he observed. "The oil-rich countries are dairy friendly."
For the EU, the cheese and butter market does not parallel that of the United States, Beck remarked. He said the crucial variable factor for the EU is how much Russia will be buying.
Levitt mentioned a strong market for cheese to the foodservice sector and the need for additional protein for the world's human population. He said there's a global shortage of protein and noted that the U.S. had not added any production capacity to address this shortage.
To a question of whether the U.S. or the EU sets the world's price on whey, Beck and Levitt agreed that neither does. "Whey seems to have established its own price," Beck suggested.
"We've been talking fundamentals but we should not discount market psychology," Levitt stated. He predicted that market psychology is likely to affect prices during the first quarter of 2013, when global milk production could run behind year earlier levels.