Global dairy conditions show reason for price optimism
A top global dairy analyst finds reason to hope for better prices in the near term.
Six of the seven major dairy exporting regions of the world currently see their milk supply contracting and the global dairy exportable surplus is now tighter than at any time since 2009. That was the word from Thomas Bailey, executive director and senior analyst with the Food and Agribusiness Research and Advisory Group for Rabobank. Those were among his reasons for greater optimism that prices would improve for U.S. dairy farmers.
He is the senior analyst covering the U.S. market and oversees forecasting and modeling for Rabobank’s global supply and demand balance.
Rabobank, the Dutch-based multinational banking company which is a global leader in agricultural financing, has 94 analysts positioned around the globe; there are 14 analysts on the dairy team. They meet once a week by teleconference to talk about trends and global market conditions.
Bailey related those market observations at a Global Dairy Symposium, hosted by the Wisconsin Department of Agriculture, Trade and Consumer Protection last week during World Dairy Expo in Madison. The program was also sponsored by the University of Wisconsin-River Falls and U.S. Livestock Genetics Export, Inc.
He ticked off a number of global factors, but concluded that there is more reason for optimism than pessimism for U.S. dairy farmers.
Bailey likened the dairy business to the children’s board game “Chutes and Ladders” and noted that he is seeing “a few more ladders than chutes” in today’s global dairy market.
The fact that global dairy supplies are tightening and six out of seven big dairy regions are making less milk has resulted in global dairy prices responding accordingly - a 35 percent increase in prices in the last three months. Bailey foresees those international dairy prices exerting upward pressure for months to come.
He called it a “massive supply adjustment” that is underway. Global demand is “expected to chug along.”
But even with the optimism, Bailey said that dairy will continue to be one of the most volatile commodities out there, adding that dairy producers will find milk prices “uninspiring” for the next 6-12 months. He predicted more consolidation of dairy farms in the United States.
The fact that the United States has heavy stocks of cheese and butter in inventory will “create some headwinds” for prices here, however. Global inventories also weigh on prices, he said, but are less of a concern because a large share of that will not be released into the marketplace.
The strong U.S. dollar, he added, would continue to put a ceiling on this price recovery but countries interested in dairy imports are willing to pay a premium – including the up-charge from the strong U.S. dollar – in order to get dairy products.
Figures from the U.S. Department of Agriculture showed dairy commodity export prices trending downward since 2014 but shooting up in the last few months. One of the factors that led to that 35-percent increase was this: New Zealand’s dairy production has dropped precipitously due to weather and resulting high rates of culling.
The supply of milk in the European Union, said Bailey, has also taken a hit as very low margins and new government incentives to draw down milk supplies make an impact. The EU milk supply grew in 2014 and 2015 and is now on the decline.
Bailey said the U.S. milk supply is the only one of the top seven major dairy areas that is “not contracting.” Further, he noted, production is moving back toward the east in the United States, as California grapples with continuing drought and added “exposure” to international markets.
“People have asked me if Wisconsin is the new California,” he related. His analysis shows that if current trends continue, Wisconsin could overtake California as the nation’s top milk-producing state by October of 2019. (However, Bailey wasn’t eager to count California’s milk-production behemoth out of the game and noted that there were many things that could reverse the march of milk production activities to the East.)
Global demand grows
Bailey said that global demand is looking healthy again and showed numbers from this year indicating several peaks in 2016 for exports from the big dairy export regions. “It’s on the way back up,” he said.
About 12-13 percent of U.S. milk ends up in export markets, according to the Rabobank expert.
Still, the excess of dairy products in storage in various regions of the world remains “above normal.” It is roughly equivalent to the quantity of product needed for about one month of international trade.
In the United States, stocks of cheese and butter may be a factor in weighing down domestic prices but butter has seen a good demand bump as trans-fat products are banned. Consumers are increasingly turning to products like higher-fat milk, butter, yogurt and cheese. “Greek yogurt is doing well and there is a lot of growth in drinkable yogurt,” he said. “Organic whole milk is outpacing all other categories (in growth,)” he said.
Bailey made the stunning statement that U.S. demand for dairy products has outstripped U.S. domestic milk production for the last 18 months. “Demand has outpaced supply” in the United States going back almost two years, he said. “The United States still isn’t producing enough milk to meet its own needs.”
Despite the strength of the U.S. dollar, U.S. exports are also picking up. To Bailey that signifies demand growth in developing markets and dairy importers’ interest in getting dairy products – even if they have to pay a premium price.
Another factor in his optimistic review of the international dairy picture is that China is back in the market as a big buyer.
Wobbly world economy
However, economists are a bit nervous about the global economy being “a bit wobbly” due to increasing debt in developed nations.
Domestically, Bailey thinks that slightly higher milk prices and low feed prices will keep U.S. dairy margins at manageable levels. This year’s growing season with plenty of warmth and rain is providing good crops that will help producers feed their cows.
He sees milk production growth continuing in the United States for the next 18 months.
Easily the biggest story for dairy price recovery, he says, is the continued decline of milk production in the EU. “France experienced the worst harvest in 60 years and (the EU government’s) supply reduction scheme could result in a billion liters being taken off the market,” he said.
It’s not just EU dairy producers who will decrease their production in coming months. “Farmers around the world have been pretty well burned by these prices and are unenthusiastic about expansion,” Bailey said.
He predicted that in five to ten years with global demand continuing to increase, a lot of domestic supplies won’t be enough. “New Zealand has grown to its limits,” he said. “The world will need to look to the other big six producers for more dairy supplies.”