Dairy Exports Hold Much Potential

Published on: 12:49PM Nov 08, 2013

China’s voracious feed and dairy demand attracts not just U.S. attention but the world’s. Can the U.S. to rise to the challenge of supplying quality dairy products to a hungry world?

I have been hearing and reading much about growing demand for dairy products in China as well as their desire to improve milk production in their country. It is unlikely they will be able to become self-sufficient in milk production, but there is much they can do to improve production and efficiency. The Chinese government and other investors are pumping large amounts of capital into their dairy industry.

The problem China is dealing with is the current high cost of production. The cost of milk production in China is estimated to be around 50% above the level in U.S. dairy as farming in China depends on purchased feed. Overall for the country, they import 80% of their soybean requirements, 5 % of corn, and all of their alfalfa hay. Hay exports to China have increased dramatically over the past few years. This, combined with lower hay production last year due to the drought, has increased domestic hay prices significantly. As the interest in alfalfa hay increases from the export market, domestic supply may tighten and prices will rise.

The appetite of Chinese consumers for dairy products is increasing. The average salary is improving as well the appreciation of their currency. Chinese consumers can afford to purchase higher-priced dairy products as their lifestyle changes.

Even though more money and effort is being moved to their dairy industry, the country never will produce enough for demand. China will continue to become a greater destination for dairy products from other countries of the world. Exports to China have grown substantially. It’s becoming the second largest country of destination of U.S. dairy products and where a lot of potential lies for the U.S. dairy industry.

However, we are not alone as other countries have their sites set on supplying the Chinese market as well. World demand in general is increasing, and countries see the potential and are rising to the challenge. Better weather this year is showing the resiliency of milk production. Milk production in Ireland in September was up 12%. The United Kingdom was up 6.5%, the Netherlands up 8.6%, Germany is up 3.5%, and France up 1.6%. New Zealand is expecting milk production to be up around 5% this year compared to last year.

Domestic demand needs to continually be cultivated and improved, but the real future is in exports. We need to rise to the challenge and supply quality dairy products to a hungry world. Projected U.S. exports for 2013 are on track to post an increase of another 16% over last year with the value of those exports up more than 25%.

One of the options debated in the Farm Bill is supply management. It seems counter productive to push for a program that may require limiting milk production for the purpose of supporting domestic milk prices. The effects of this will be circular. Lower milk prices would require a decrease in production, resulting in higher milk prices. Higher milk prices could limit domestic and international demand, resulting in lower prices. Production would then need to be reduced in order to support milk prices, potentially reducing both domestic and international demand. The greater result could be loss of export market share as well as domestic business as more imports could find their way to our shores. This could be a cycle that could be detrimental to the U.S. dairy industry.

I recommend implementing fence strategies of purchasing $16.75 and $16.50 put options and selling $18.00 call options. Over the past five years, milk prices declined from November to December four of those years. The futures market has a decline already anticipated. The purpose is to protect farm income and this strategy allows that while also allowing for some upside potential.

Upcoming reports:

- October Milk Production report on November 19
- December Federal Order Class I price on November 20
- October Cold Storage report on November 22.
- October Livestock Slaughter on November 22

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

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