A robust import program by buyers in China and a weather-affected season in New Zealand were the perfect ingredients for a short-term rally in the dairy sector during the first quarter of 2018, but challenges may emerge during the second and third quarters that could further pressure the sector, according to the latest “Dairy Quarterly Q1 2018: Turn the Pressure Down” report from RaboResearch.

While Rabobank said the export engine has been running on most cylinders since mid-2017, weather risks have now been extended beyond New Zealand as the European Union battled a cold front, Australia had localized bush fires and Argentina is experiencing drought conditions.

“The peak period of milk production in the Northern Hemisphere still looms as a pressure point for the global market in (the second quarter of) 2018,” Rabobank senior dairy analyst Michael Harvey said. “However, Rabobank does not see the Northern Hemisphere peak milk flows completely overwhelming the global market. EU milk production growth started 2018 on a high note, but is also expected to trend lower throughout the year.”

The Rabobank report said previous expectations for the extent of pressure on global markets in the second quarter of 2018 have moderated, with global rebalancing looming in the second half of 2018.

According to the report, farm-gate milk prices during the first quarter continue to weaken, which will exert more downward pressure. Additionally, the risk of higher feed prices has begun to emerge.

What to watch

Rabobank provided an overview of events to watch during the second and third quarters of 2018. As expected, trade remains a concern, particularly for the U.S.

Regarding the North American Free Trade Agreement, Rabobank reported that some progress occurred during the seventh round of negotiations but added that the U.S. market share of Mexico's nonfat dry milk (NDM) market eroded by 10% in 2017 as Mexican buyers opted to purchase from the EU and Canada.

Then, there is the ongoing negotiations with China. According to Rabobank, China accounted for nearly 10% of U.S. dairy exports in 2017. However, rising tensions between President Donald Trump and China's President Xi Jinping has put that business at risk.

“The threat of trade war has escalated. While there is no immediate impact on dairy trade, the threat of trade wars spreading to broader trade flows and impacting currency valuation fluctuations is real,” Rabobank noted.

In addition to trade, the possibility of rising feed prices has also begun to weigh on this year’s outlook as drought conditions have emerged in key growing regions.

“At a time when milk prices are falling and expected to trend lower in the short term, dairy farmers are confronting the prospect of higher global wheat, soybean and corn prices,” the report noted. “As always, key weather risks persist across the global grain and oilseed complex, but the impact of dairy farmer margins pertinent in the near term.”

Rabobank said all eyes are also on key global player the EU and where the additional milk will flow during the peak season. The European Commission had planned to clear 109,000 metric tons of skim milk powder (SMP) and 60,000 metric tons of butter, but this is no longer the case as the EU reduced the ceiling for SMP to zero for 2018.

“The economics favor cheese productions over butter and SMP, but the reality is that all plant capacity is likely to be tapped out in order to clear the anticipated record-high milk output,” according to the report.

The last two things to watch for during the next two quarters relate to China. Rabobank said China’s Certification & Accreditation Administration has announced that the four-year certification of a batch of offshore plants is up for renewal this year. As such, the report said there may be a risk that some fail the renewal audit process.

Rabobank also relayed that China is in the process of revising its national food safety standards for raw milk, pasteurized milk, sterilized milk and the testing method for identifying the use of recombined milk in pasteurized and sterilized products. The proposed standards would exclude recombined milk (from powder) as an ingredient in sterilized milk.

“It is still early in the public consultation product, but the proposal would have implications for trade in (whole milk powder),” the report noted.

Market recap

June live cattle futures were mixed this week, but were higher than the week prior. Contracts closed higher Monday at $102.50/cwt. and, despite closing lower Tuesday and Wednesday, finished higher Thursday at $103.70/cwt.

May feeder cattle futures started the week lower, closing Monday at $135.525/cwt. and Tuesday at $135.275/cwt., but the losses were recovered by Thursday’s higher close of $139.975/cwt.

The Choice and Select beef cutout closed lower at $212.48/cwt. and $200.61/cwt., respectively.

May lean hog futures rallied this week, closing higher Monday at $67.325/cwt. and Thursday at $69.325/cwt.

Pork cutout values were mixed this week. The wholesale pork cutout closed higher at $66.06/cwt. Loins and hams were lower at $66.75/cwt. and $52.30/cwt. Bellies were higher at 88.70/cwt.

Hogs delivered to the western Corn Belt were lower, closing Wednesday at $47.72/cwt.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on April 6 at $1.0712/lb.

According to USDA, egg prices were steady, with a lower to sharply lower undertone. Offerings were moderate to heavy, while supplies were mixed. Demand was moderate to fairly good.

Large eggs delivered to the Northeast were sharply lower at $2.07-2.11/doz. Prices in the Southeast and Midwest also were lower at $2.19-2.22/doz. and $2.03-2.06/doz., respectively. Large eggs delivered to California were unchanged at $2.75/doz.

For turkeys, USDA said the market was steady, with mixed undertones. Offerings and demand have been light to moderate. Prices for hens and toms were unchanged at 73-84 cents/lb.