In its first quarter 2014 dairy report released today, Rabobank sees strong income over feed cost (IOFC) margins for at least 12 months.
U.S. milk prices are now at record highs, and corn and soybean prices have plunged, dropping total feed costs by about 25%. "These factors combined have driven IOFC up by a staggering 120%," say Rabobank analysts.
On the demand side, Rabobank sees slowing milk consumption in the United States as high milk prices filter through to dairy cases. At the same time, reductions to food stamps, passed in the 2014 farm bill, will also dampen dairy sales.
Nevertheless, China’s seemingly insatiable thirst for milk will continue to drive exports and world prices. "Like a dragon that just drinks more when supply improves, China raised its imports from international markets another level, more than accounting for the entire increase in exportable supply through the fourth quarter of 2013 and most likely through February," say Rabo analysts.
They see U.S. farmers responding to higher prices by the second half of 2014, mostly as a result of more and better forage supplies. But it won’t be explosive growth, because many farmers need to rebuild equity and use extra cash to secure acreage to grow feed rather than build barns.
The wild card in global markets is China. "The most crucial demand side question is whether China will sustain the frenetic buying we have seen on the international market throughout the last 12 months," says Rabobank analyst Tim Hunt. He remains convinced that Chinese buying has more to do with falling local milk production than a surge in end use.