Correction expected in dairy markets

Correction expected in dairy markets

Prices for milk and dairy prices should remain strong in 2014 but drop from near-record highs next year.

MORE milk and higher milk prices have been the global trend for 2014, according to Robert Chesler, vice president of the FCStone LLC food division.

Chesler told the Dairy Outlook Conference that the majority of the key dairy-producing countries are experiencing some degree of increase in milk production volumes, along with near-record highs for milk prices.

Currently, New Zealand's 2013-14 production season is setting records and receiving record milk prices. However, El Nino is anticipated to develop in its 2014 winter/spring, which generally disrupts milk production.

Likewise, milk production in the European Union is also on an upward swing with near-record prices. In April 2015, the milk quota will be abolition. It will be crucial to watch how EU dairy producers respond. Chesler projected that dairy producers will produce more milk at a quicker pace than can be processed.

For the U.S., milk production growth is below average, but demand, especially globally, is stronger than expected. Milk prices have finally come close to record highs.

Australia, on the other hand, started the year with an 0.8% decline in growth from the previous year, with weather events hurting overall production. Still, Australian dairy producers are seeing year-over-year price increases.

For 2014, China is forecasted to increase milk production 6% while consumption climbs 7%. The Chinese government is pushing for an increase in domestic production and encouraging larger dairy operations through subsides.

The country will import a large amount of feed, mainly from the U.S., even exceeding the record amount of alfalfa it brought in last year. As a result, China's domestic production costs will be very high and will hinder the growth of its dairy industry.

Although worldwide milk production for the start of the calendar year was significantly higher compared to previous years, dairy producers are currently not meeting global demand for milk and dairy products (Figure 1). Worldwide, milk production is forecasted to grow 2.5-3.0%.

Overall, global demand for milk and dairy products is robust. New market opportunities are emerging, and it will come down to which country can expand to meet the needs of consumers.


U.S. dairy market

For the most part, U.S. dairy producers see merit in sustaining robust dairy prices. The majority of producers are more cautious about expansion versus the last time dairy prices reached high levels in 2008.

"Dairy farmers are anxious to pay off debt, to build equity and to improve their position with their lenders for strength," Chesler said. "Dairy farmers are optimistic, but they remember touching that hot stove and remember what happened" in 2008.

Based on recent history, lenders are also apprehensive about the future of the U.S. dairy industry, which can hamper herd growth.

Still, at the end of the day, the fact remains that only a finite number of dairy cows is available globally. Chesler said, as a result of higher beef prices, there are more Holsteins in feedlots. Combining that with the tight supply of heifers, dairy producers worldwide are competing for females.

In general, expansion will be difficult globally, but especially in the U.S. and particularly for the leading dairy-producing state, California. According to Chesler, there will be no rush to expand extensively or open new farms, so in reality, it will be a test to see how many more cows can be milked in existing facilities.

For the U.S., the export market is the key to increasing sales in a protein-demanding world.

While all eyes are on China, most trade in U.S. dairy products has occurred with Southeast Asia. In particular, South Korea was a sleeping giant with a huge surge in imports of U.S. cheese, Chesler explained.

In 20 years, he predicts that Africa will be the next big export market opportunity.


Dairy outlook

The dairy market is anticipated to make a correction, but prices should not be at long-term historical lows, Chesler said. Were it not for the worldwide economic downturn, global dairy prices in 2008 would have stayed at that level.

"Unless we have a major disruption to gross national product and buying power from developing nations, we (the U.S.) have increased competition for product," Chesler added.

For the U.S., the income over feed cost (IOFC) estimate for 2015 will back down from record levels, but it will still be at a strong profit level (Figure 2).

Breaking it down by product, Chesler said block cheese prices should hover above $2.00/lb. and average $2.04/lb. for the remainder of 2014, while butter prices will drop below $2.00 and average $1.9395/lb.

He added that block cheese and butter prices will continue decreasing for 2015, but not beneath the 2008-12 average of $1.61/lb. for both.

Additionally, the Class III milk price will linger at around $20.00/cwt. and is penciled at an average of $21.21 for this year. The 2015 milk price forecast is calculated to average $19.00/cwt.

Chesler noted that, based on "historical performance, it appears the dairy markets should correct from high prices. There are significant chances for catastrophic events to occur to the milk production side of the equation that yield significant risk to bullish moves after a bullish market."

He warned that producers "need to be a very cautious, because if El Nino materializes in full force and you have major disruptions to milk production in significant regions — India, New Zealand, Australia — that is going to leave the U.S. and EU to do a huge amount of the supplying to the world."

Correction expected in dairy markets

Volume:86 Issue:26

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