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Global dairy outlook suggests lower prices

June 30, 2014 | 0 comments

NEW YORK

Global milk production is increasing, the export market to high-end buyers has peaked and lower milk prices are on the horizon.

That was the gist of Rabobank's quarterly global dairy update during a webinar presentation featuring three of the firm's 70 dairy and agricultural sector analysts who are stationed around the world. Rabobank, which is based in the Netherlands, is an international banking and financial services company with major interests in food and agriculture.

Speakers during the webinar were senior analyst Kevin Ballamy, global strategist for food and agriculture research Tim Hunt and dairy sector analyst Tom Bailey.

Bellamy reported that milk production in the European Union increased by 6 percent during the first quarter of 2014 compared to 2013 and by 7.7 percent in April. He said the Netherlands, Germany and Ireland accounted for the bulk of those increases while the United Kingdom, France and Poland also had higher milk production. A mild winter, early spring and spring flush of milk production contributed to those numbers.

Although the EU is under a milk production quota until April of 2015, Bellamy said dairy farmers who exceeded their quota could easily afford the fines that are assessed on their excess production. In early 2013, when weather problems cut into milk production, prices rose to as high as $27.50 in parts of the EU, he reported.

Bellamy noted that milk production in the UK, which had been a net importer of cheese, has been spurred by purchases of dairy processor firms by Arla Foods (based in Denmark) and by a company based in Germany. They are offering milk prices about 10 percent above those that had been typical in the UK.

Export explosion

In the EU and elsewhere, domestic consumption of dairy products has been flat or falling, but the export market was booming during much of the past year, Bellamy said. He cited an 18-percent increase in exports, led by volumes of skim milk powder, by the EU for comparable periods in 2014 and 2013.

"China soaked up most of the extra product" while Russia also obtained some, Hunt said. During the first four months of 2014, China boosted its imports of dairy products by 68 percent compared to the same period in 2013.

Falling milk production in China due to weather problems and dairy cattle disease and the country's intent to build up stocks of dairy products prompted that explosion in exports, Hunt explained. He added, however, that China's surge on imports is probably over because of the combination of that stock buildup and a stabilization of domestic milk production in recent months.

U.S. market outlook

In a somewhat unusual scenario, prices for dairy commodities in the United States have topped the world average during the first half of 2014, Hunt said. But that phenomenon is not likely to last much longer, he warned.

Hunt cited the lowering of payments to recipients in the federal Supplemental Nutrition Assistance Program; the rise in retail prices for dairy products; the decline in sales of natural cheese during April and May; and the monthly 2 to 4 percent falloffs in retail fluid milk sales in the United States.

Despite its relatively high market price, butter has been the gold mark for the U.S. dairy product market, Hunt said. He noted the that AA butter prices in the spot market on the Chicago Mercantile Exchange have been running above world market prices (During the last week of June, they hit $2.35 per pound).

Hunt cited year-to-year retail butter sales increases of 16 percent in December and 15 percent in May along the "Eat Butter" suggestion on the cover of the June 23 issue of Time magazine. This followed the March 2014 article on saturated fats in the Journal of Internal Medicine, which was favorable to butter, he added.

Production outlook

In the EU, the milk production increases are likely to continue because of a good supply of pasture grass in the short term and the gearing up by dairy farmers on cow numbers and building additions in anticipation of the end of the production quota, Bellamy said. He does not expect "a flood of milk" as a result because there are land capacity restraints in a number of the major production areas, but prices are likely to be lower, especially as the export market moves to buyers who will be paying less than China did for dairy products.

Bellamy believes that factors other than the end of the EU's production quota next spring hold the key on the market outlook. He predicted the EU's milk production will increase by 10 million tons in the upcoming year-to-year comparisons.

About 80 percent of that extra milk will be processed to make whole milk powder, Bellamy predicted. With Russia becoming a greater factor in the exports, including its recent refusal to accept any product from Ukraine, he suggested that the EU dairy sector needs to find new outlets for its excess milk production.

What's almost certain is that China will be cutting back sharply on its dairy product imports during the next six months, Hunt said. This leaves countries in Southeast Asia, the Middle East and North Africa as the top potential outlets — none of which are able or willing to pay as much as China did for imported dairy products, he added.

U.S. price prospects

There are two ways to evaluate the outlook for milk prices in the United States, Bailey said. One is the likelihood that by early 2015, they are likely to fall by 15 to 17 percent — to between $18 and $19 per hundred for Class III — from their current record high levels. He expects Class IV prices to remain higher because of the strong demand for butter and milk powders.

On the other hand, dairy farmers will probably still be enjoying very favorable income over feed cost margins, despite the price cutback, thanks to a lowering of feed prices compared to the past two years, Bailey said. He acknowledged, however, that dry hay prices will remain relatively high.

Bailey cited the 1.4-percent increase in U.S. milk production during May compared to May in 2013. With cow numbers up by 1 percent and lower feed costs, Hunt expects that percentage to increase to between 2 and 3 by the end of 2014.

World view

Should the El Nino climate factor come into prominent play in nearby months, Bailey said this could bring more rain to the drought-stricken West Coast of the United States and to South America. It could also hit southern and eastern Australia with another drought while nearby New Zealand would face less risk of a drought.

New Zealand's milk production for the first half of its current major production cycle is up by 19 percent compared to its drought-affected production a year ago, Hunt indicated. Bailey said dairy farmers there now have an extra supply of silage and herd numbers are up by 2 to 3 percent.

In South America, Brazil has become a net dairy exporter during the past five years, Bailey said. He noted that the country's dairy sector is very reactive to product prices and that Brazil's domestic economy has been quite weak.

For the top seven dairy exporting nations, Hunt expects that milk production overall will be up 2 percent compared to 2013. He pointed out that the 6-7 percent increases for the early part of 2014 were somewhat misleading because milk production was down during that period in 2013.

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