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MADISON - Those involved in the dairy industry were more optimistic about better prices in April than they are now, said Dr. Bob Cropp in an analysis of the dairy complex on July 23, in Madison when he spoke at a Dairy Exchange meeting organized by the Department of Agriculture, Trade and Consumer Protection.

Forecasting, something Cropp has done for decades at the University of Wisconsin-Madison, is harder than ever. “There is more uncertainty than I have ever seen in the past,” he told a room full of dairy industry leaders. 

In April, he noted, U.S. dairy exports were the highest ever recorded, accounting for 18.8 percent of production and this led to optimism about better prices for the remainder of the year.

“If we don’t export dairy products, we have to move it through the domestic market and it takes a large decline in dairy product prices to do so,” he said. “Dairy export is the key factor.”     

Even in May, with trade tensions already brewing, U.S. dairy exports were at 15 percent of domestic production, which was the third highest month in history for exports. But by May exports to Mexico had dropped. “Exports had been on a path to a new record high in 2018,” Cropp said.     

The countries that are being targeted in the current trade and tariff skirmish include our top destinations for dairy exports. Mexico has placed a 25 percent tariff on cheese and their market accounts for one-quarter of our cheese exports, he noted. Mexico did not place a tariff on non-fat dry milk and it is a huge market for that dairy product.

China placed an additional 25 percent tariff on U.S. dairy products, so added to the 8 percent they already had, the tariff is now 33 percent, Cropp explained.

Canada, Mexico and China, the three trading partners we are now in a tariff war with, are in the top five for every individual dairy product that gets traded out of the United States. Cropp and other analysts have noted that if we don’t have exports, we can’t profitably sustain the number of cows we have or the growth in productivity per cow that goes with improved genetics and dairy cattle practices.

Cropp said that overall, there has been no growth in U.S. cow numbers in the last year. California had 18,000 fewer cows this June compared to a year ago but Texas is up 16,000 cows and produced 6.6 percent more milk than a year ago.

Wisconsin has 4,000 fewer cows than a year ago and has lost 583 herds since last year – 338 of those herds have been lost from January through June.

The loss of export markets has contributed to lower milk prices as stocks of dairy products build in U.S. cold storage. Butter stocks are 8 percent higher than a year ago and there is 6 percent more cheese in storage than a year ago. “Everything except dry whey prices have dropped,” he said.

In May, with exports still humming, Cropp said he was optimistic that Class III prices (cheese milk) would be $16 per hundredweight by July and $17 by October. The tariffs didn’t take effect until early July, but prices began dropping in mid-June as domestic and international buyers backed off in anticipation of lower prices ahead, he added.

An additional problem for Wisconsin producers, who have traditionally enjoyed a competitive market for their milk, is that the premium structure — which pays farmers more for better quality or higher components or some special characteristic of their milk — has all but disintegrated, Cropp said. That’s due to the huge oversupply of milk that is out there.

Farmers who decided to participate in the federal Margin Protection Program for Dairy will see payments for April and May he said, because of diminished market prices. Cow slaughter is 4.9 percent above last year but that isn’t enough to reduce supply and make up for lost exports.

“The big question will be exports,” Cropp said. The USDA has filed protests with the World Trade Organization but it could take years for any kind of solution to come from that international group.

Cropp said that U.S. dairy products were price competitive in the world market prior to the initiation of this tariff war. But on a per-pound basis the tariffs have added 60 cents to butter, 50 cents to cheese, 20 cents to non-fat dry milk and 10 cents to whey, taking all of the products out of the competitive price range on the world market.

Adding further consternation in the trade arena, U.S. dairy competitors are aggressively seeking exports with the countries we are in a trade war with. China is dropping all tariffs for dairy products from Australia, and once trade deals are finalized it can be hard to break back into that market, Cropp said.

Mexico is already talking to the EU about sourcing its dairy products from there.

“There can be some disturbing long-term impacts,” Cropp said. “It’s anybody’s guess what’s going to happen next. There’s so much uncertainty at this point.”

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