Dairy proved one of the best commodity performers of 2016, as the price slump of the previous two years at last curbed output. Has the rally got legs?
At the start of the year everyone seems eager to present their predictions of what’s coming for the future, and the markets gurus are no exception.
Right now their view of the future looks fairly good, although not exactly what I would call glowing. USDA is predicting a milk price of around $17.25/CWT. While better than the $13-$14 farmers were getting at one point, it’s still not really all that good. To give you some historical perspective, with bonuses for butterfat, protein, low somatic cell count (i.e. our cows were healthy) we were getting around $13 for our milk back in 1979 or 1980. So now you know why dairy farmers were in so much financial trouble over the last year or so as prices dipped below $14/CWT(2).
The US actually escaped the worst of it. New Zealand and other milk producing regions around the world suffered far worse than we did. NZ was hit especially hard because a huge amount of their milk goes to China, and when China began to cut imports of milk, the NZ market crashed so hard it actually caused a devaluation in the NZ dollar and had repercussions through their whole economy.
China has been slowly ramping up imports again. While the country has been increasing its own dairy production, it’s having trouble meeting demand for various reasons. Many Chinese consumers still remember the melamine horror of a few years ago where domestic milk was deliberately contaminated with melamine(1). Consumer confidence in domestic products plummeted, increasing the demand for imported dairy products. Over the last few years China has increased it’s own milk production, and by improving food safety they’ve made some progress in restoring the confidence of consumers. But China still doesn’t produce enough milk to satisfy demand and imports have had to increase to keep pace.
New Zealand and the EU both saw production decline because of the plummeting prices. The EU didn’t return to the quota system it had a couple of years ago, but it did institute pricing incentives to get dairy farmers to reduce quantities. Between the low prices, farmers in NZ being pushed out of business, and the new pricing system in the EU, milk production in both areas has dropped by several percent.
Not in the US, though. Here production has continued to ramp up. Depending on whose data you believe, production in the US during 2016 went up anywhere from 2 – 4%, and there seems to be no end in sight at the moment. But then the US isn’t as sensitive to the international market as is the EU and NZ. Domestic demand has more of an effect, and it has remained fairly strong. But while we weren’t hit quite as hard as the EU or New Zealand, the prices dropped to the point where a lot of dairy farmers were suffering financially and were just barely hanging on. At $17 – $17.50 the situation is a bit better, but not by much.
I’m not all that optimistic, to be honest. In the US we’re looking at continued growth in production, and almost no increase in demand for milk products. While demand for butter has grown and the cheese market has remained fairly stable, we still have huge stockpiles of both sitting in warehouses. The market for fluid drinking milk is flat or is even shrinking. And now that the holiday season is over demand for both butter and cheese is going to shrink.
None of this bodes well for dairy farmers in the upcoming year. About the only good news dairy farmers have seen is that feed prices have remained low. But that’s bad news for the farmers who raise grain, especially corn. Corn prices have been sitting in the $3.40 – $3.52 range for months on the futures market, with farmgate prices dipping down to the $2.75 level or even less.
Will things ever improve? I hate to say this, but in all honesty, no. Farming has always been like this. You have long periods of mediocre prices, followed by a year or two of absolute panic, with the occasional good year thrown in just often enough to give you hope that maybe things will get better. And then the rug gets pulled out from under your feet…
- When melamine is added to milk, it makes milk quality tests indicate it has a higher protein content than it really has so they can get a higher price for it. It sickened hundreds, even thousands of people and even caused the death of some children. China acted quickly and clamped down hard, even executing some of the people responsible. But the damage was done and people didn’t trust domestically produced milk any more.
- CWT stands for hundred weight. While you may buy milk by the gallon in the store, farmers get paid by weight, not volume.