ECONOMIC REPORT - Dairy Prices Inch Upward as the Industry Looks Towards 2020

If one likes or dislikes what is happening in the dairy industry, just stick around. Dairy is always changing. Sometimes for the better; sometimes for the worse. One thing we can say with certainty is dairy is never boring.

Much has happened since our last report, and we will look at a few factors that will be shaping the next 18 months. One factor is that U.S. dairy prices continue to inch upward. Domestic dairy sales have been brisk due to a strong economy. While export sales to China remain much lower, both Mexico and Canada have lifted their tariffs on U.S. dairy products. Tariffs from China over the months have weighed heavily on the U.S. dairy industry. Chinese tariffs on U.S. dairy products vary but can be as high as 45%.

Recent reports from the U.S. Dairy Export Council reveal that in the 13 months since Chinese tariffs were put in place, U.S. exports to that country have fallen 43%. Cheese sales to China have dropped 45%. Skim milk powder is down 70%, and whey products are down 49%. Whey sales to China would have likely been better if it were not for that country’s outbreak of swine fever. In recent years, Chinese imports of U.S. whey products have been used to supplement swine feeding programs. Despite these issues, annual U.S. dairy exports remain impressive, representing around 15% of the milk supply.

U.S. aggressiveness in securing new global dairy export opportunities has been fruitful despite the loss of China and others. U.S. dairy exports set a record of $5.6 billion in 2018 by expanding to new markets, many of them in Southeast Asia. The opportunities to sell more globally are expanding, as the reputation of high-quality and reliable U.S. dairy products are internationally recognized.

At this time, the U.S. and China have called a truce to the imposition of any new tariffs. Both countries are sitting down to see if a resolution can be worked out. President Donald Trump and Chinese leader Xi Jinping have directed their staffs to seek solutions to the trade conflict. This effort could take some time.

Meanwhile, the critically important United States-Mexico-Canada Agreement has gotten the green light from Mexico, but the legislation is stalling in the Democratic-controlled U.S. House of Representatives and Canada’s Parliament. The proposed USMCA would provide numerous benefits to agriculture, especially the dairy industry. Nearly all U.S. agricultural organizations have expressed their support of USMCA, which modernizes the 25-year old NAFTA. Flaws that Democrats have with the new deal are worker protections, environmental concerns and the extended protection pharmaceutical makers receive with generic drugs.

The USMCA outlined between the three North American countries provides tariff-free access for U.S. goods bound for Mexico and for most goods sold into Canada. The Canadian part of the agreement lifts specific barriers for U.S. dairy products, making them more competitive to market into that country.

U.S. Trade Representative Robert Lighthizer has recently shifted much of his time from negotiations with China to working on USMCA on Capitol Hill. It is rumored that Lighthizer is well-liked by both Republicans and Democrats. While progress is being made, many think the process is being dragged out so that it can become more of a political issue in the 2020 elections. Others feel Democratic leader Nancy Pelosi is nearly ready to bring it to the House floor for a vote. One key holdup has apparently been overcome, which should satisfy Democratic concerns. The government of Mexico has approved a comprehensive reform package that assures their workers are treated both fairly and with respect. Trump has repeatedly said that he wants no credit for USMCA and wants this to be a bipartisan piece of legislation. U.S. approval of the new deal could happen at any time, but some observers believe it will not move until the fall.

Milk production growth has slowed both in the U.S. and around the world. Several years of lower prices have forced a contraction in the number of farms and milk cows. While growth in production per cow remains on its upward path, higher feed costs and less than optimal weather in much of the country are keeping supplies in check. The USDA reported May milk production down 0.4% from the same month last year. The number of May 2019 milk cows dropped by 89,000 head compared to May of last year, a decrease of nearly 1%. While output per cow continues to expand, the speed of its growth has slowed.

Contracting supply means less milk is flowing to manufacturers. Therefore, the buildup of stocks in storage is also slowing. In its latest Dairy Products Report, the USDA revealed May butter production down 4.2%. April butter production was down 4.8%. Human nonfat dry milk production in May was up 5%. American cheese production was up 0.5% in May, while cheddar production was up only 0.2%, and total dry whey down 8.2%. The USDA reported that cheese stocks in cold storage made an unusual counter-seasonal decline in May. This decline of 12.8 million pounds was the first time ending cheese stocks fell from April to May since 2012.

Other major dairy producing countries around the globe are experiencing similar issues that are contributing to a world tightening of milk supplies and rising prices. The USDA stated in its report, Dairy: World Markets and Trade, that only two out of 44 major milk producing countries, India and Brazil, will likely expand the size of their herds this year. Weather has been less than optimal in many major milk producing countries. There is a severe heat wave in Europe that is taking a toll on production there. Weather in New Zealand has been fair, and milk production is expected to be good but not robust. The ongoing drought in Australia has decimated its dairy industry. Australian dairy feed is scarce and expensive. Dairy Australia recently reported the country’s milk production is down 7.7% from the previous year, and monthly declines are now consistently in double digits. Tightening world milk supplies are contributing to a steady rise in global dairy prices.

USDA’s latest Milk Production Report showed the U.S. to be down -0.4% in May. The top 24 states were down -0.1% in May, as well. Note, the USDA has added Georgia to its list of top states, hence the change from 23 to now the top 24. Average production per cow for the top 24 states was up 11 pounds from May 2018, but the number of cows slipped to 55,000 less than May 2018. May milk production in some key states were California (+1.3%), Arizona (-4.3%), Idaho (+1.4%), Texas (+5.4%), Minnesota (-0.2%) and Wisconsin (-0.4%). It is rumored that at least one large herd was added in Texas, hence the large jump in that state’s production. Major northeast states milk production for May showed New York at +1.0%, Ohio at -4.4%, Pennsylvania at -7.0% and Vermont flat with no change. Hot summer weather and higher feed costs may keep this trend of slipping milk production moving into the fall.

Extremely cool, wet spring weather in many portions of the U.S. delayed planting schedules and has created uncertainty with respect to quality, availability and prices for the remainder of the year. Concerns over wet weather reducing both crop yield and quality have contributed to rising prices of corn, soybeans and alfalfa hay — three key components in dairy feed.

Less milk production, lower storage numbers and uncertainty have all been contributing to a slow but steady increase in monthly prices. Chicago Mercantile Exchange cheese block prices began this year at just below $1.40 a pound and have climbed upward to near $1.85 recently. Cheese barrels have also risen but with more gyrations. After slipping a bit, both sizes of cheese are rising in price again at the CME. Whey prices have been falling slow and steady since the beginning of the year. Now, whey appears to be leveling off. The loss of whey export volume to China is a major reason for the price downturn. CME nonfat dry milk prices are significantly higher than they have been for the last four years. The June 2019 average CME nonfat dry milk price was about $1.05, compared to $0.83 for June of last year. The CME butter price has been remarkably steady since the beginning of the year. Butter has been on a slow rise from $2.20 in January to over $2.40 in July. It will be interesting to see how butter prices move over these hot summer months.

According to USDA’s July Livestock, Dairy, and Poultry Outlook, the robust U.S. economy is contributing to good domestic sales of dairy products in 2019. Domestic use is helping to both reduce storage stocks and utilize milk supplies. The USDA is expecting domestic use to remain strong for the remainder of 2019 and into next year.

USDA dairy forecasts for the remainder of 2019 reveal it expects higher feed costs to reduce output per cow by 10 pounds. Forecasters increased their 2019 estimate for the size of the national milking herd by 5,000 head. The combined effect of these two actions kept overall milk production expectations the same. For 2020, the USDA made no changes to the size of the herd but lowered its forecast for production per cow over concerns that higher expected feed prices will continue. These adjustments reduced the USDA’s 2020 estimate of annual milk production a small amount from its previous month’s forecast.

The USDA raised its 2019 cheddar cheese price estimate by $.02 to $1.660 per pound due to strong recent performance and demand. Whey prices were forecast lower due to expected ongoing declines in exports. As a result, the 2019 Class III price estimate was raised from the previous month by $0.15 to $16.05 per hundredweight.

The USDA lowered its 2019 butter price estimate by $0.01 to $2.315 per pound, a result of higher expected imports. The nonfat dry milk estimate was raised $0.005 to $1.020 per pound. The combined effect of the butter and nonfat dry milk adjustments raised the 2019 Class IV forecast by $0.05 to $16.45 per hundredweight. Note, the USDA expects the higher nonfat dry milk price to more than offset the lower butter price in 2019. The 2019 all-milk price is now forecast at $18.20 per hundredweight, up $0.20 from the previous month forecast.

For 2020, USDA forecasters expect no change to the size of the U.S. milk herd at 9.355 million head. Higher expected feed prices have decreased estimates of 2020 production per cow to 23,710 pounds. Note, this remains an impressive increase of 345 pounds per cow from the 2019 production per cow average. With no change in cow numbers, but a slight drop in per cow output, 2020 milk production has been reduced 0.1 billion pounds to 221.8 billion pounds.

The strong U.S. economy is expected to continue into 2020, contributing in a positive manner to domestic use. Overall exports are forecasted to remain favorable except for whey and butter. Butter exports are decreased primarilybecause world prices are so much lower than the U.S. price. The USDA’s forecast for 2020 cheddar cheese prices is now $1.730 per pound, an increase of $0.005 from the previous forecast. Dry whey was lowered $0.015 to $0.36 per pound due to the expected weakness for exports. As a result of these adjustments to cheese and whey, the 2020 Class III price forecast is unchanged at $16.65 per hundredweight.

The 2020 butter price was lowered $0.02 per pound to $2.345 on higher expected imports and lower exports. Little change was made to forecasted nonfat dry milk; therefore the 2020 Class IV price was tweaked lower by $0.10 to $16.75 per hundredweight. The 2020 all-milk price is now expected to be near $18.85 per hundredweight, $0.05 less than last month’s forecast.

At this point, it appears USDA forecasts are expecting prices to keep moving upward. The only exception is whey. Class III prices are expected to move from $14.61 in 2018 to $16.05 in 2019 and to $16.65 in 2020. Class IV prices are expected to move from $14.23 in 2018 to $16.45 in 2019 and to $16.75 in 2020. The all-milk price is expected to move from $ 16.26 in 2018 to $18.20 in 2019 and to $18.85 in 2020. Year 2018 prices are actuals, while 2019 and 2020 are government estimates.

Some non-governmental industry observers, including a few in academia, believe the USDA’s estimates are too conservative and that actual prices will prove to be even stronger than forecasted above.

NED Magazine