Dairy outlook not so rosy for 2018
The milk price forecast for 2018 is starting to solidify, and good news is hard to find. U.S. milk production growth has slowed, but global supply is still hampering future price increases.
The challenging 2018 milk price forecasts continue to cloud the dairy horizon. For some months, we have been recommending that 2018 cost of production on Pennsylvania dairy farms would need to be below $17.50/cwt in order to cash flow, and even that cost of production will not provide much profit margin at the current forecast 2018 Class III prices.
As you can see from the numbers in Table 3: 24 Month Actual and Predicted Prices, our PA Milk price forecast for the first 10 months of 2018 is $16.86.
Dairy product prices are likely to decline during the first six months of 2018 due to increasing stocks of some milk products as well as reduced domestic use of dairy products occurs.
Forecast for Pennsylvania milk prices for the first 10 months of 2018 is $16.86.
Bears are everywhere
Bearish factors keeping futures prices in check continue to include the heavy inventories of dried milk products in inventory in the E.U. as well as the expected milk production increase this year in the European Union.
The EU is currently the world’s largest exporter of milk powder; last year they moved 50% more powder onto the world market than the United States. So, even though there are glimpses of positive trends — U.S. cow numbers not growing, total U.S. milk production only growing at a bit over 1% instead of 2% or greater, this positive news is not seen as denting supply enough for the markets to anticipate future price increases.
U.S. farm income and debt levels
USDA has calculated the Net Farm Income (profit earned on all farms across the United States from the sale of all commodities produced) will be up 3% from the previous year and will total $63.2 billion for fiscal year 2017.
This is good news that Net Farm Income (NFI) has increased slightly year over year, but a sobering realization about NFI is that in 2013, NFI was $ 129 billion. In the space of 4 years, the national income from agricultural production dropped by more than half.
This staggering erosion of profit is being worked out in the Ag economy in many ways. USDA just released figures showing that in those 4 years (2013-2017) farm debt rose almost 20%. Eventually, if commodity prices do not rise, debt levels can’t continue to rise because there will not be the cash flow to service the increased debt.
Putting additional pressure in this area is the expected Federal Reserve actions this month. An announcement on an interest rate increase is widely expected. Obviously, the most direct impact of this interest rate increase on farm businesses is on the interest rate of lines of credit and short term variable rate loans.
According to Bob Cropp, Professor Emeritus at the University of Wisconsin Cooperative Extension and Mark Stephenson, director of Dairy Policy Analysis from the University of Wisconsin, both the EU and New Zealand are having stronger milk production years.
These two will compete with the U.S. for dairy export markets. USDA is projecting 2018 Class III milk prices between $15.30 and $16.10.
With declining Midwest milk premiums, basis, milk prices in the region are likely be more like 2015 than the past year.
Milk production in Wisconsin during November 2017 totaled 2.45 billion pounds, up 1 percent from the previous November, according to the latest USDA, National Agricultural Statistics Service – Milk Production report.
The average number of milk cows during November, at 1.28 million head, was the same as last month but 1,000 fewer than last year. Monthly production per cow averaged 1.915 pounds, up 20 pounds from last November.
Milk production in the 23 major States during November totaled 16.2 billion pounds, up 1.1 percent from November 2016. October revised production, at 16.7 billion pounds, was up 1.3 percent from October 2016.
The October revision represented a decrease of 27 million pounds or 0.2 percent from last month's preliminary production estimate.
Production per cow in the 23 major States averaged 1,861 pounds for November, 9 pounds above November 2016. This is the highest production per cow for the month of November since the 23 State series began in 2003.