2015 Dairy Outlook: Clouds with a Silver Lining?

November 24, 2014 06:04 AM
2015 Dairy Outlook: Clouds with a Silver Lining?

Editor's note: This is one of eight 2015 marketing outlooks, the AgWeb.com editors are providing to help you succeed and be profitable in the coming year. Please check back each Monday for another outlook.

Class III futures already reflect a price decline, but recovery could begin by summer.

Dairy producers are bracing for a substantial drop in milk prices from this year’s record highs, but strong worldwide demand for dairy products continues to underpin long-term market optimism.

January 2015 Class III futures already reflect the price decline, falling to the $17 per-cwt. level from this year’s $24 heights. Dairy prices could decline even further by spring to $15.50 per cwt., says Mary Ledman, dairy economist with the Daily Dairy Report, an industry newsletter. But she also projects that prices will rebound, reaching $16.80 in July and $18.50 in October.

Just as the cure for high prices is high prices, low prices will help dairy prices recover, Ledman says. Moreover, “late spring and early summer typically see a seasonal trend of improving prices as milk moves away from cheese to fluid milk to fill school demand,” she says.

Most economists are still predicting a marginally profitable year for dairy in 2015. Corn prices in in $3 per bushel range will help dairy producers, says Michael Swanson, chief economist for Wells Fargo. Feed costs dropped in 2014, resulting in record income-over-feed cost margins for dairies. But a weather event—or fewer acres planted to corn because of poor profitability—could conceivably push up corn prices next fall to $5, even $6/bu., he says. The same is true for milk prices. While futures prices suggest a $17 Class III bottom next year and All-Milk prices between $19 and 20, Swanson says it is conceivable that prices could fall to $15.

Dairy’s downward price slide is rooted in expectations of record-high milk production, lower exports and ample supplies of dairy products next year.

America’s dairies will yield record output next year, according to the Nov. 10 World Agricultural Supply and Demand Estimates report.  2015 production is expected to reach 212.3 billion pounds of milk, 6 billion pounds higher than this year’s projected output. And that’s well above the 201.1 billion pounds of milk the U.S. produced in 2013.

Internationally, Oceania’s New Zealand and Australia as well as the European Union are likely to curb milk production starting in the spring of 2015 “as farmers respond to low prices,” Ledman says.

Lower exports are expected as strong U.S. prices make American products less competitive on the world market. At the same time, an increasingly strong U.S. dollar is making American products more expensive for foreign dairy-product buyers.

“Obviously conditions are much tougher heading into 2015 than they were a year ago,” says Alan Levitt, vice president of communications with the U.S. Dairy Export Council. “Global milk production remains heavy and continues to overwhelm import needs. Markets will adjust eventually, as they always do, but we don’t expect much if any price recovery until second half of 2015.”

As a result, U.S. dairy exports will struggle in the months ahead, Levitt says, and volumes could be down 10-15% in the first half of 2015.

“By the second half of the year, the world should be more balanced, prices should rebound and U.S. export performance should improve,” adds Levitt. “For the full year, we’d expect U.S. export volumes to be down 1%-5%.”

Among product categories, says Levitt, cheese is likely to hold up the best. Milk powder and whey products are expected to see moderate declines, and butterfat is expected to have the toughest time.

“All this is based on few key assumptions,” he says. “It assumes no weather shocks. It assumes China works through its inventories by spring and comes back to the market. And it assumes the Russia ban on European Union product is lifted by mid-year. If things develop differently, it could change the outlook accordingly.”

Market watchers like Stewart-Peterson market analyst Bob Devenport aren’t over-reacting to dairy’s lower price projections for the first half of next year. “There’s a long way to go before 2015 is all said and done,” Devenport says. “”We’re going to see a lot of volatility between now and then.”


2015 Marketing Outlooks
The editors at AgWeb.com are taking a look at experts’ 2015 projections for corn, beef, wheat, hogs, soybean, cotton, machinery and dairy.

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