Dairy exports needed for a price rebound
Milk production last year was a 'tale of two regions' with sharp drops in production in some areas and too much milk in others.
Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, noted that in the Northeast region of the United States there was so much milk that it was being dumped. Even as close to America's Dairyland as Michigan, milk was being dumped because there was not enough processing plant capacity, he said.
Yet in the far West, milk production dropped drastically as California, which is the nation's leading milk production state, entered its fifth year of historic drought. While Wisconsin dairy farms increased their milk production an overall 4 percent last year, California producers dropped more than 3 percent.
'And that drought won't be broken this year even if the rains we've seen recently continue,' he added, during a presentation at the ninth annual Wisconsin Agricultural Economics Outlook Forum in Madison.
Overall U.S. milk production went up just a little over 1 percent in 2015, he said, a modest increase over 2014 levels. During that high-watermark year for dairy prices, farmers increased their numbers of dairy cows; once prices started to drop, they didn't hang onto as many cattle.
Stephenson compared the price of feed in California and Wisconsin. Hay here is selling for $150 per ton; in California it is $260 per ton. Wisconsin corn is $3.47 while California corn is $5.01 per bushel. Soybean meal here is $370 while California dairies are paying $420.
'This has impacted decisions about how much milk to produce,' he said. 'Last year Wisconsin surpassed California in production per cow for the first time in 60 years.'
He noted that a growing U.S. economy – unemployment is now down to 5 percent – domestic sales of dairy products were good in 2015. Though fluid milk sales continue their downward slide in per-capita consumption, demand for whole milk, cream and butter sales have been strong.
'Butter sales have been particularly strong and butter prices have defied the downward pressure seen in milk powder markets,' he noted.
But the 'buoyancy of domestic dairy sales' stands in start contrast to export performance, Stephenson said. Export sales had represented about 16 percent of milk production in the beginning of 2015 but declined to almost 14 percent by the end of the year. That extra 2 percent of milk production not leaving the United States caused cheese inventories to build by year's end.
It was a 2-percent reduction in exports in 2008 that led the way to the price crash that devastated the dairy industry in 2009. 'We need exports,' Stephenson said.
He noted that monthly consumer confidence reports show a striking similarity to those of 2009 and he has some fear that U.S. consumers might back off on their purchase of dairy products.
Stephenson believes that the 'export picture will define our milk price.' New Zealand, a major dairy export nation, is experiencing lower milk production and may experience more of those losses if the strongest El Nino in 50 years dries up pastures there. That strong climatic force may also cause dairy production losses in Australia, another of the world's large dairy export nations.
The European Union, another dairy production hot spot, removed production quotas from its dairy farmers in 2015. A few European countries have increased dairy production substantially, he said, 'and world stocks of dairy products are still large.'
While farm milk prices have declined sharply here, he said U.S. milk prices are holding up better than most. New Zealand and EU dairy prices are worse than here, he said. 'The domestic economy has held our prices up.'
As in 2007 and 2008 one of largest export destinations for dairy products has been China. That nation's growth in GDP has slowed considerably and that is reflected in the reduction in China's dairy product purchases, Stephenson said.
Russia is suffering from the effect of low oil prices (since they are an oil-rich nation and exporter) and international sanctions imposed after the invasion of Ukraine. 'Their imports of dairy products are well below peak levels,' he noted.
Because of the world glut of dairy products, much of 2016 will be spent trying to work down that international supply, he said. This will keep downward pressure on U.S. milk prices and postpone any milk price recovery until possibly late in the year.
Stephenson predicted that for 2016 average milk prices will be at or slightly below those of 2015. If there is a price rebound it will happen in the last quarter of the year and will happen slowly.
'The good news is that feed prices will remain well below levels of the last few years,' he noted.
The annual Wisconsin Agricultural Economics Outlook Forum was held on the UW-Madison campus Jan. 21.