Domestic and global prices for milk and most dry dairy products continue to hover at or slightly above multi-year lows with little prospect for improvement until 2017 when slowing growth in milk production is expected to make an impact. But there are near-term bright spots in the otherwise dour dairy outlook. Cheese and especially butter prices have held up better than expected, and domestic demand for milk products overall has been good, in part due to low prices.
Rabobank, in its Dairy Quarterly Q1 2016, offered a pessimistic outlook for much of 2016, forecasting that active milk production and growing inventories globally, the strong dollar and Russia’s absence from the market for at least another year would limit export opportunities for U.S. dairy products.
“Talk of (global) price re-covery has quieted,” Rabobank said, noting that “stronger-than-expected E.U. production and weaker demand from developing markets” pressured prices in recent months. “As these downside factors took effect, we saw the prices move roughly 15% lower.” Although milk production continues to grow globally, the growth rate entering 2016 was slower.
Rabobank noted that farmers globally have been slow to reduce production in reaction to low milk prices for a number of reasons, including the need to generate cash, climatic conditions, milk price supports, “pure hope” and other factors. Milk producers also have benefited from low feed prices.
Conditions in the global dairy market are important because of their impact on the U.S. dairy industry. Low prices and reduced demand globally have limited exports of U.S. dairy products and resulted in increased imports in some cases. As a result, milk and dairy product supplies are larger, which in turn pressures prices in the United States.
The U.S.D.A. forecast 2016 U.S. milk production at 211.8 billion lbs, up 200 million lbs from its March forecast and up 3.2 billion lbs from 2015. The 2016 growth rate of 1.5% is greater than the 1.2% seen in 2015 but pales in comparison to a 2.4% jump (4.9 billion lbs) in 2014. On a milk-fat basis, the U.S.D.A. expects U.S. imports to increase by 32% from 2015 and exports to decrease by 5%. On a skim-solid basis, imports are forecast to increase 5% and exports decrease 3% on the year.
Rabobank noted regional differences in U.S. milk production trends, with production down in several western and southwestern states but up in most Midwestern and Central states.
“The Midwest continues to post surprising growth figures,” Rabobank said. “Producers in the region have had higher milk prices through much of 2015 as the majority of their milk goes into Class III (cheese), which maintained a premium over Class IV for most of 2015.” In contrast, February milk production in New Mexico was down 6% from a year ago, Texas was down 2% and top-producing California was down 3%.
Average prices in 2016 were forecast lower for all four products (cheese, butter, N.D.M. and dry whey) used in the formula to determine milk prices. Consequently, milk prices are expected to decline with Class III (used to make hard and soft cheese) down 12% from 2015, Class IV (used for butter and dried products) down 8% and all milk (all classes, including Class I consumed as fluid milk and Class II used in products like yogurt, cottage cheese and ice cream) down 11%.
In early April, prices quoted by the U.S.D.A. for dry whey were down 45% from a year ago, N.D.M. was down about 25% and cheese was down 5% to 10% while butter values were up about 20%.
Larger inventories remain problematic for several products, although stocks of N.D.M. on Feb. 29 were down 10% from a year ago, the U.S.D.A. said in its latest Dairy Products report. At the same time, total stocks of dry whey (a byproduct of cheese manufacturing) were up 21%.
Cheese production in February was up 8% from a year earlier while butter output was up 10%, the U.S.D.A. said. Total cheese stocks in cold storage on Feb. 29 were up 11% from a year ago and butter stocks were up 32%.
Large domestic supplies are expected to be tempered some by good demand.
“The ‘fat is back’ trend has proven stable, and we believe we will see this continue going forward as Americans opt for more butter, cheese, full-fat yogurts and fluid milk beverages,” Rabobank said, noting that the U.S. economy continues to perform relatively well and consumers benefit from low gas prices, “leaving them more money in their pockets for spending on food and in particular, eating out.”
