There's bad news, but the good news for dairy farmers is world markets are improving and feed supplies will not be an issue.

While the U.S.  is on pace to produce record large corn and soybean crops, Dan Basse, president of AgResource Company, points out the U.S. dollar has stabilized as emerging markets are showing signs of recovery.

"The stability in emerging markets' economics looks to help world dairy trade, especially into southeast Asia",  Basse said during "The Global Markets: The Impact", a Professional Dairy Producers' World Class Webinar offering a dairy outlook into late 2017.

However, the U.S. dairy herd reached a 20-year high in September and beef prices have dropped.

ARC research argues for a broad trading range of $14 through 17.50 cwt into mid 2017. On rallies above $16.50, hedge sales are advised, Basse said. Producers need to lock down any profitability.

Against the backdrop of a world with too much grain, U.S. 2016 milk production will be record large at 210 billion pounds with U.S. cow numbers on the upswing. "A lot of us would think that with milk profitability scraping around negative margins that there would be liquidation and the cull sector would actually be accelerating," Basse observed.

The big reason it's not is because steer prices have been falling to the largest year--on-year loss on record. There has been, roughly, a 40 percent decline in beef prices over the last year, Basse said.

There has been an unprecedented retention of beef cows for reproductive purposes. That translates into U. S. beef supplies increasing into 2018, which will ultimately pressure cash cattle prices down to around 90 cents by the middle or end of 2017. The cull market will follow closely.

Looking across the longer term landscape, Basse expects prices to eventually settle back to normality, meaning cash steer prices of 85-90 cents.

The strange situation can be traced to annual cow/calf margins that have been extreme for over three years and are likely to stay profitable through 2017.  "In 2014/2015,the average cow/calf producer was making over $500 a head," he said. "Cow/calf men have responded with big numbers."

Today, packers are making more money than can be found on record, Basse added, citing $81 a head. "The packer margins are the highest ever after he has endured, roughly, three years of negative numbers, and he is not willing to pass along the savings of declining beef cattle prices or fed cattle prices or dairy cow replacement prices," he explained.

Prices are expected to hold at current high levels into the holidays.

Feed lots are caught in the middle. Last year, feed lot operators raising cattle from 550 pounds to 1,100 pounds were losing as much as $300 a head and, now, $50-70 a head.  "That industry has just been bleeding cash," Basse said.

He calculates the cull price and cash cattle market are within a couple of dollars of making a seasonal bottom. The time frame to sell appears to be mid-November to mid-January or, perhaps, early February.

It helps that China has just approved U.S. beef for sale and will allow it to come into that country without duty. "This is a big deal," Basse pointed out.

The future of dairy

The domestic dairy outlook is colored by a cattle population that is riding a 20 year high. "We have an overcapacity of U.S. dairy cows which is going to bedevil us, along with high product stock, as we move into the middle of 2017," Basse said."It's going to be a liquidation process that's going to take some time."

Globally, he noted, cow numbers are rising with the world dairy herd now approaching 141 million head, the largest going back to 1993.

Given the beef market and ample grain/forage supplies and dairy producers' reluctance to cull cattle, the U.S. dairy herd is expected to hold at high levels with plentiful milk supplies.

"To me, this is the biggest problem a U.S. dairy farmer is facing - his neighbor or himself, in that he is not liquidating herds. He's not keeping that herd size close to 2015 levels, even though his profit margins are worse than a year ago," Basse said. "It is this expansion in the dairy inventory which is why the milk markets haven't been able to respond."

He thinks the record large August U.S. milk production is part of a month-to-month trend that will persist well into 2017 and, excepting the spring flush, hold at $14.25-$16, trading within a broad range.

U.S. milk production will be record large in 2016 and, unless cow numbers are reduced, could be above manufacturing capacity during the flush time frame. "This means that some dairy farmers may have to dump milk because there is no place to go with it," Basse said.

That's why futures in Chicago for the middle of 2017 are trading at $14.20- 14.70. "I don't expect that to get a lot cheaper, but it's harder to get the market much higher than that with the kind of production prospects we have," he noted.

The problem with milk production on farms is compounded by record high U.S. cheese and butter stocks. "Not only do we have record milk supplies, we still have products that are in abundance in cold storage," Basse pointed out.

The fear is that as the industry moves into the seasonal build time for butter - usually from January into May - that some facilities may run out of storage space.

"This is the worry as we think about the butter market and why cash butter prices are the lowest in two years," Basse explained. "We've just got too much in storage and it hangs above the market in terms of a cap on prices."

Currency is key

World dairy herds are growing as milk producers seek to take advantage of beneficial  shifts in monetary values. "My eyes are on  India, Brazil and Argentina," Basse said, noting the peso is down 60 percent and Argentine farmers are making money hand over fist.

One bright spot is dramatic rallies in export U.S. butterfat values. "Today, European butter is more expensive than U.S. butter, and Oceana butter is at parity with the U.S.," he said. "I believe there is an opportunity for U.S. products going forward."

U.S. dairy exports are starting to recover, suggested by a 17 percent increase in U.S. dairy exports in 2016. "We like the opportunity to export more product because of what's happening with European and New Zealand prices, principally on butterfat and powder," Basse explained.

Drinking problem

The other factor bedeviling the U.S. milk market is the slide in fluid consumption to 152 pounds per person, which is the lowest on record. "The average per capita consumption of beer now exceeds the average per capita consumption of milk", Basse observed. "This is concerning,"

Although the decline in drinking milk is likely to persist into 2017, ARC finds reason to believe it will start to stabilize between 140-150 pounds per person..

Besides the people who will consistently drink milk, Basse pointed to the development of new milks, such as farmlife, which offers twice the protein of regular milk.

"As we get into the future of dairying, we think that the protein and fat content of milk will be rearranging to give what we would call craft products that will cause better consumption going forward," Basse said.

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