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LIVESTOCK MARKETS: Milk prices poised for modest improvement

milk production
U.S. dairies betting international demand growth will offset increases in supply.

After a few years of significant challenges, the outlook for U.S. milk producers is beginning to improve, according to a new report from CoBank. Despite projected supply increases, milk prices are poised for modest improvement in the years ahead thanks to new export opportunities and gains in processing and production efficiency, the bank said, adding that the improvement will be less dramatic and less cyclical than over the last several years.


“We’re seeing dairy farm expansions, meaning producers are hopeful that prices will increase from today’s levels,” said Ben Laine, senior economist at CoBank. “These dairies are banking on the future and on global growth. We believe that there is cause for cautious optimism given prospects for strengthened international demand and the industry’s long track record of innovation.”


CoBank said dairy processors have been hard-pressed in recent years to keep up with the strong growth in milk supply. While production has been strong around the world, that growth has slowed in recent months across most of the major milk exporting regions of the world. The U.S. has been the exception, the bank noted, adding that the size of the domestic herd has grown, as well as its efficiency in terms of milk per cow.


The U.S. Department of Agriculture (USDA) projects U.S. dairies will produce over 225 billion pounds of milk in 2020 (Figure 1), approximately 7% higher than today’s output. And domestic demand for milk and milk products will remain relatively flat, given the maturity of the U.S. consumer market, the report noted. Nonetheless, Laine said the industry is poised to benefit from overseas demand in Asia, Latin America and Africa driven by population growth and increased middle class consumption.


Exports now represent about 14% of all U.S. milk production, compared to less than 8% a decade ago. That increases the amount of exposure U.S. dairies have to currency risk, geopolitical events and other unpredictable factors. “The outlook for the next several years is positive, but precarious,” Laine said.


One immediate challenge facing the industry is that processing capacity has not kept up with the growth in milk production.


“New processing plants and plant expansions over the next couple of years will provide some relief,” he said. “Meanwhile, the U.S. dairy industry must do everything it can to maintain and develop domestic demand and evolve with customers. This includes the development of innovative products to adapt to changing consumer tastes.”


Going forward, the U.S. will need to position itself strategically to be able to compete with other mature dairy producing regions, particularly the European Union, the report suggested. Additionally, the U.S. dairy industry must invest in establishing relationships within sophisticated global supply chains to further develop demand and open new markets, it added.


“Success will hinge on the ability to balance innovation in domestic products with responsiveness and competitiveness abroad,” Laine said.


U.S. dairy exports led by sales to Asia


Improved sales of nonfat dry milk/skim milk powder (NDM/SMP) to Southeast Asia and whey to China, plus a recovery in world commodity prices, led U.S exports to their highest value in 16 months, according to Alan Levitt, vice president of communications and market analysis at U.S. Dairy Export Council (USDEC). Overall export value was $426 million in October, up 5% from the depressed levels of a year ago. U.S. dairy exporters shipped 172,245 tons of milk powders, cheese, butterfat, whey and lactose in October, topping year-ago levels for the fifth straight month.


Whey exports continued their resurgence, led by heavy buying from China and Southeast Asia. In the August-October period, U.S. exports of whey products to China increased 63%, year-over-year, and sweet whey shipments alone were 257% higher. Whey exports to Southeast Asia were up 68% in September-October.


Exports of whey protein concentrate continued at a record pace in October; in the first 10 months of the year exports were up 19% from 2015 levels. In the June-October period, exports of WPC to China were up 26%.


Meanwhile, milk powder exports in October increased 13% from last year to 59,208 tons. Sales to Southeast Asia were nearly double year-ago levels, paced by record sales of skim milk powder (11,160 tons) to the Philippines. Exports of SMP to Pakistan also were higher, but shipments to Mexico lagged for the second straight month, Levitt noted.


October numbers, according to Levitt, were also supported by increased cheese sales to South Korea and record butter exports to Canada. Cheese shipments to South Korea were 43% higher in October, while Mexico was up slightly. Japan and the Middle East/North Africa (MENA) region, on the other hand, were off from prior-year levels.


Levitt said U.S. butterfat exports were 2,833 tons, more than triple year-ago volume. More than 80% of October shipments went to Canada, previously a relatively minor customer, he added.


Market recap


The December fed cattle future market started the week strong. Nearby contracts closed higher Monday and Tuesday at $110.35 /cwt. and $111.125/cwt., but fell Wednesday into Thursday’s lower close of $110.725/cwt.


January feeder cattle futures followed the same trend. Nearby contracts closed higher Tuesday at $128.975/cwt. but fell Wednesday and closed unchanged Thursday at $127.70/cwt.


For the beef cutouts this week, Choice and Select were higher at $193.46/cwt. and $178.54/cwt.


December lean hog futures were mostly higher this week. Nearby contracts closed higher Monday and Thursday at $57.375/cwt. and $62.40/cwt.


Pork cutout values were higher this week. The wholesale pork cutout was lower at $77.97/cwt. Loins and hams were higher at $72.36/cwt. and $80.03/cwt. Bellies were also higher at $100.31/cwt.


Hogs delivered to the western Corn Belt were higher this week, closing at $53.45/cwt. on Thursday.


In the poultry markets, the "Poultry Market News," which reports the Georgia dock, continues to be suspended as the Georgia Department of Agriculture reassesses the data collection protocol. The last reported price was Nov. 28 at $1.0975/lb. Breast meat prices on that date were lower at $1.36/lb. Leg quarters were lower at 28 cents/lb., while wings were higher at $1.57/lb.


USDA reported the Eastern Region whole broiler/fryer weighted average price at 84.31 cents/lb. on Dec. 9.


According to USDA, egg prices have been steady, with a mostly higher undertone. Offerings have been short to light in the South Central, light to moderate in California and light in all other areas.  Supplies have ranged short to moderate, but mostly light. Demand has been moderate to good.


Large eggs delivered to the Northeast were about 30 cents higher at 88-92 cents/doz. Prices in the Southeast and Midwest were also higher at 92-95 cents/doz. and 84-87 cents/doz., respectively. Large eggs delivered to California increased to $1.45/doz.


For turkeys, USDA said the market was steady to weak, with light to moderate offerings. Demand has been light. Prices were lower at $1.04-1.11/lb. for hens and $1.11-1.14/lb. for toms.

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