Cropp: Strong Dairy Exports Support Outlook for $18 Milk Prices

August 27, 2013 01:57 PM
Cropp: Strong Dairy Exports Support Outlook for $18 Milk Prices

Dairy economist says the market isn’t reflecting all the industry’s bullish fundamentals.

Although he predicted last month that $19 milk was possible this year, retired University of Wisconsin dairy economist Bob Cropp still thinks prices can reach the high $18 level—even as Class III prices slip into the $17 range.

Speaking in their "August Dairy Situation and Outlook" podcast, both Cropp and UW dairy economist Mark Stephenson say the market is not reflecting all the bullish fundamentals that underpin the dairy industry. 

"The export market is strong," Cropp says, adding, "The [futures] market is going to recover and strengthen more than it’s now showing."

Stephenson   exports graph 8 27 13With China banning New Zealand’s dry whey and other products due to contamination concerns, and shipments declining from all other major exporters like the European Union, the U.S. dairy industry has gained market share, Cropp says. A June report showed exports accounting for 16.5% of U.S. milk production. That’s a record, Cropp says, and well above the 13% the U.S. saw last year.

The U.S. has typically been the world’s third largest dairy exporter, accounting for about 20% of overseas shipments, behind New Zealand and the EU, both at 35%. With this year’s record U.S. export pace, says Stephenson, "we’ve got to be getting close to being an equal partner."

"We’re narrowing the gap," responds Cropp, adding that if U.S. manufacturers made more foreign-demanded products like skim milk powder, the export pace could strengthen.

Stephenson   margins graph 8 27 13Another bullish fundamental is the strong projected profit margin between milk and feed, helped in part by weakening corn and soybean prices. In addition, recent reports show the high cheese inventory beginning to decline, which could begin to push prices higher. Cropp thinks cheese prices, now in the $1.70 range, could climb to $1.85, and butter could advance to $1.50.

While July 2013 milk production showed a 1.1% over year-earlier levels, Cropp says that’s no surprise, given the hot summer weather that curtailed output on dairies and the fact that July 2012 saw a greater-than-normal drop in production due to the widespread drought.

U.S. milk production has reached record levels, but exports have allowed that growth, Stephenson says. He raises the question of what would happen if other world milk producers raise their production or global demand falls. "That’s a lot of milk that gets pushed back on our domestic markets," he says.

Although that happened in 2009, Cropp doesn’t foresee a similarly negative effect happening. For starters, it was the worldwide recession that stopped demand back then, he says. Moreover, New Zealand’s ability to greatly expand exports is limited and the EU is embroiled in quota policy issues.

"Everyone’s pretty optimistic that we’re going to grow in the export market," Cropp says.

Moving on to the farm bill, neither Stephenson nor Cropp expects new ag legislation by September.

Watch the 11-minute podcast here

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