Editor's note: This is one of seven 2014 marketing outlooks that the AgWeb editors are providing to help you succeed and be profitable in the coming year. Please click here to read the full series of outlooks.
Record exports and lower feed costs are bullish for dairy, but clouds loom.
Dairy economists are pointing to exports as the brightest constellation in the 2014 dairy outlook – and with good reason:
• U.S. dairy exports in 2013 not only will mark a fourth consecutive record year but a new, high watermark for the ninth time in 10 years. By year’s end, U.S. dairy exports will have risen some 30% in value over year-earlier levels, to $6.7 billion, says Alan Levitt with the U.S. Dairy Export Council. In volume, exports will have climbed by about 18%, to 3.9 billion pounds of milk solids.
• U.S. dairy exports are on track to account for an impressive 15.54% of the nation’s 2013 milk output. That’s by far a record and compares to the recent normal of 13%. From May to October, exports accounted for nearly 17% of U.S. milk production. "Ten years ago, we exported just 5% of our milk production," Levitt says. "That means we’ve found new markets for 10-12% of our milk."
Adding to 2014’s export-driven optimism are dairies’ improving margins, fueled by this year’s strong milk prices and the recent decline in feed costs.
U.S. dairy producers have just witnessed the second-highest year ever for milk prices. The All-Milk price averaged $19.80 for the first 11 months of 2013. Only 2011 saw a higher yearly average, at $20.14 per cwt.
"Income over feed costs in the months ahead looks to be the best since 2007," Levitt says.
Improved dairy margins are largely due to the decline of corn prices, which have dropped some 44% to about $4.30 per bu., down from August 2012’s high of $7.63. "Corn prices are at their lowest prices in three years and could go lower," says Joel Karlin, market analyst for California-based Western Milling.
While soybean meal, another dairy feed, doesn’t match the magnitude of corn’s decline, it’s still fallen some 20% in price, Karlin says.
Despite these positive dairy factors, market watchers caution optimists to beware of clouds ahead. One feed source that’s not expected to get any cheaper is alfalfa hay. Prices could remain close to record-high levels, as inventories remain low after the 2012 drought, this year’s weather problems in Wisconsin and ongoing water shortages in the West. Top-quality hay is selling for $280-$300 per ton.
"There’s an insatiable demand overseas for top-quality hay," Karlin says. "Alfalfa hay prices will continue to be a concern for U.S. dairy producers."
Another concern for U.S. dairy producers is their heavy debt load. Those who rely on purchased feed continue to struggle. In addition, getting a construction loan to build a new facility remains impossible for most dairies.
USDA forecasts U.S. milk output next year at an all-time high of 205.3 billion pounds. (Photo: Catherine Merlo)
Another possible bearish factor is 2014’s expected surge in milk production. USDA forecasts U.S. milk output next year at an all-time high of 205.3 billion pounds. That will come as expected stronger milk prices and lower feed costs support a more rapid increase in cow numbers and output per cow, USDA noted. That added milk could pressure prices.
"Milk prices won’t collapse, but they may drop to $16.70 per cwt. by February," says Robert Cropp, professor emeritus at the University of Wisconsin-Madison and a well-known dairy marketing specialist.
Jerry Dryer, editor of the Dairy & Food Market Analyst newsletter, expects Class III prices to dip to $16 per cwt. in the third quarter of 2014 before rising to $16.75 in the fourth quarter.
Dryer is also paying close attention to Class IV prices, which represent dairy powder products. With strong overseas demand for skim milk and whole milk powder – and Dairy Farmers of America’s new powder plant in Nevada coming online – Dryer sees Class IV strength ahead. "Class IV prices are going to get the lift," he says.
The U.S. won’t be the only major milk producer to ramp up milk output. Global players like New Zealand and the European Union will be back in competition after 2013’s weather setbacks. Typically, the two regions each account for 30-35% of the world’s dairy exports. The drought that constricted New Zealand’s milk output – and dairy exports -- this year has abated, leading market watchers to project more production in 2014. The weather conditions that hampered EU milk production this year also have improved, raising prospects for greater milk supplies in the coming months.
Their recovery could slow U.S. exports, says Cropp.
Levitt, however, thinks 2013’s tight global milk supplies mean supply pipelines need to be filled in the year ahead. "Production will come back, but it will be absorbed by pent-up demand," he predicts.
Since 2005, U.S. milk production has increased 14%, a gain of 24 billion pounds. "That growth has been enabled, in large part, by expanding export markets," adds Levitt. "Since 2005, more than half of the ‘new’ milk produced by U.S. dairy farmers has been turned into a dairy product that has been sold overseas. Exports have been a clear path to growth for U.S. dairy farmers."