Better Milk Prices Ahead?

November 25, 2015 02:56 AM
 
Better Milk Prices Ahead?

An uptick might come in mid-2016

Although milk prices are at or just above breakeven cost of production levels heading into 2016, hope is on the horizon.

That’s according to Tim Hunt, an economist and global dairy strategist with Rabobank. Hunt spoke this fall in Las Vegas at the Elite Producer Business Conference for dairy.

“The 2015 global market crash has depressed U.S. exports and pushed down producer returns,” he says. “And if U.S. butterfat premiums erode in coming months, farm gate prices will fall further.”

Top Global Drivers. Yet the supply brakes are being applied globally, and lower world prices are reawakening consumers. The result? “Pricing will likely enter a sustained upward phase in mid-2016,” Hunt predicts. Four factors lead him to reach that conclusion: 

  • China will likely work through its inventory of dairy stocks. Meanwhile, Chinese milk production will not keep pace. Lower milk prices in China mean small dairy farms are continuing to exit the business, and any new development of large farms has been shelved. 
  • New Zealand production could decline nearly 10% in the first half of 2016. That’s because feeding supplements isn’t profitable. 
  • European Union (EU) milk production is expected to barely grow at all. That’s amid lower milk prices and reduced cash flows. U.S. milk production might grow just 0.5% next year. 
  • Excess global supplies are roughly 5 million metric tons. That represents roughly the annual milk production of Idaho. Even so, it is just three weeks of international trade. “Lower milk pricing will help unlock additional consumption,” Hunt points out.

Underlying Factors Shift. There could, of course, be some hiccups along the way. “EU quotas coming off and euro currency valuations could result in more milk than we are expecting, or there could be further struggles in the global economy,” Hunt says. 

Key market drivers are much different now than in 2009, when the last major price crash occurred. In 2009, dairy imports fell because, in large part, capital markets locked up and importers found themselves unable to finance purchases. 

“Demand conditions were also very different in 2009, when the world economy was contracting 2%,” Hunt adds. 

This year, China slowed its dairy purchases significantly because it imported huge amounts in 2014. The Chinese are working through inventories and will likely be back in buying mode by next summer. 

Editor’s note: Jim Dickrell is editor of Dairy Today magazine, part of the Farm Journal Media family.


Early 2016 Sees Limited Global Dairy Growth 

A recent Rabobank forecast shows milk production in key world markets will be mixed in the New Year, with limited growth in the U.S. and Australia and significant declines in countries such as New Zealand and Argentina.

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