Market Watch Diary: Lower Milk Prices are Here to Stay

September 9, 2015 01:41 PM

At least until the middle of next year.

Mother Nature is about the only force that could intervene before then. By this I mean some twist in the weather somewhere that absolutely slams milk production lower.

European Union (EU) milk production was up 0.8% during the first half of 2015, this 
after being up 5.4% during the first six months of 2014. With production quotas gone as of March 31, June EU output was up 3.9%.

U.S. milk production was up 1.6% during the first half of this year, and my forecast has it maintaining this pace through much of 2016. USDA is expecting an increase of about 1.1% from July through December of this year. This on top of a 3.5% increase last year.

Milk production in New Zealand was up just 1.0% January through June of this year, but this modest increase came on top of 16.3% growth during the first half of 2014.

Meanwhile, in Australia output was up 2.5% during the first half of this year and up 7.7% versus two years ago.

The net result is four milk supply regions and 3.4 billion pounds more milk than a year ago. In other words, milk production was up 2.7% versus the first half of 2014 and up 6.7% versus the first half of 2013.

Demand simply could not keep up with supply even if all were well with the world. But the world isn’t well. There are two elephants in the room, both contributing to less demand: China and Russia.

Chinese demand has been in the tank for about nine months now and as I write this column the Chinese stock markets are collapsing. Demand will likely be trimmed further still. Meanwhile, as the one year ban was about to expire in early August, Mr. Putin saw fit to extend it. And he did a slam dunk on folks smuggling cheese and other dairy products in to Russia.



Simply put, with limited Chinese dairy demand, New Zealand is looking for a home for their products in markets where the U.S. had been selling. With no Russian dairy demand, 
EU manufacturers are also looking for a home in markets where the U.S. has been selling.
Bottom line: Production is increasing dramatically and export shipments are below one and two years ago across most products for most exporters. Supply and demand are totally out of whack.

The two “Price Trends” charts shown below tell the story: Prices of fat and skim solids worldwide are sharply lower. That said, domestic demand here in the U.S. has been remarkably strong. Our cheese and butter markets have been very resilient. 

The key words in that last sentence are “have been.” Elevated U.S. prices can’t and won’t last. We’ve already felt the pain in the nonfat dry milk and whey markets. Cheese and butter are next.

Low prices are here to stay.  

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