November Dairy Market Update
At the start of November, world dairy product prices fell to below the low-point in 2012. Skim milk powder (SMP) prices out of New Zealand were $2,500/MT or $1.13/lb. this week. German and Dutch processors reported SMP prices at $1.0964 and $1.0539, respectively. In 2012, New Zealand SMP prices bottomed at $2,700/MT ($1.22/lb.) European prices reached even lower levels that year with German prices finding bottom at $1.17 and Dutch at $1.11. At that time, milk supply was starting to ease back. By June 2012, milk output from the top exporting countries (AR, AU, BR, EU, NZ, US) was just 2.2% higher than the previous year and a far cry from January’s year-over-year gain of 4.2%. Global buyers stepped into the market finding bargains and sufficient milk powder to supply burgeoning dairy demand helping to rebalance supply and demand once again.
At this point in the cycle, global milk production is still expanding showing little sign of slowing until possibly next spring when the southern hemisphere dries off cows ahead of its winter. Since the start of the year, milk production from the top exporting countries (AR, AU, BR, EU, NZ, US) has been at least 4% higher than the prior year each month. China is showing tremendous signs of milk production recovery with October milk output estimated to surpass last year by 11%. Currently, cows are just past their peak production in these regions – while cows are milking a farm is unlikely to cull the animal. That said, at the end of the season, those same cows require supplemental feeds in order to extend milk production into the late season. Given lower price forecasts and current market weakness it is unlikely most farms will spend money on supplemental feed to extend milk production as they did last year. Given the point in the season it is doubtful that Australia, New Zealand, Argentina and Brazil’s milk production slows appreciably until March at the earliest and as late as May. When exactly will milk production slow down – it could hinge on the price of milk at the farm level.
Europe could be another region to ease back on milk supply – but again a slowdown could still be well out in the future. European milk is running 4.4% more than a year ago in August. European milk prices paid to producers dropped to €37.01/100kg in August, the lowest price of the year and 7% less than the start of the year. That said, August milk checks are far higher than €31/100kg back in 2012. Given far lower feed prices than in 2012 current milk price still are providing a substantial margin for farms. European milk prices will have to drop considerably lower in order to stem the flow of milk off the farm. At the same time, European manufacturers have been quick to add capacity given the end of quota in April 2015 likely causing some processors to be somewhat reluctant to pass along lower milk prices. The pace of price declines have been slow to materialize, and with processors needing to fill new capacity suggests that European milk supply could be here to stay for the mid-term.
A milk slowdown in the United States could take until next summer based on current milk prices driving historically high margins. Using the new Margin Protection Program’s margin calculation, U.S. dairy farmers experienced the highest estimated margin of the year. Nationally, the actual margin calculation was $12.93/cwt. Although the all-milk price moderated in October, the feed price decline was substantial. Based on current futures markets, and an assumed $250/ton alfalfa cost, feed costs under the Margin Protection Program (MPP) are just over $10/cwt. next year. Despite lower futures markets this week, Class III milk futures are still averaging over $17 next year forecasting lower, but still solid on-farm margins for 2015. Cooperatives market 78% of the milk in the United States annually. Presently they are working to stem heavy milk flows next spring by reinstituting quota and base programs for their farms. Additionally the new MPP program is an unknown that could keep milk flowing as farms receive make-whole payments from the USDA for low margins.
While global manufacturers are slowing building stocks and starting to see the impact of far lower world dairy prices, these lower prices have yet to translate into substantially lower farm checks. As the holiday demand season winds down more milk will likely flow to manufacturing uses putting further pressure on processing margins. Near the first of the year, manufacturers could have considerable incentive to pass lower prices onto farms in order to ease milk production back to bring supply and demand once again back into balance. How long this down cycle takes will depend on how long and how low milk prices go next year.