It’s been a tough ride for dairy since 2014. Some might say the past year and a half has been like a profit derailment. Production will need to come back into check with demand to get the dairy profit train moving forward.
Exports will be a big part of that equation, says Mark Gould, analyst for Dairy and Food Market Analyst Inc.
Gould spoke at the 2016 Pennsylvania Center for Dairy Excellence’s Dairy and Financial Risk Management Conference on Sept. 28 at Central Penn College. U.S. dairy farmers produce more milk than can be consumed based on the domestic market. That surplus needs to be exported to keep prices strong.
“When we are not exporting, prices are lower,” he said. “Every time we decline in exports also coincides with years that remain close in your memories.” Gould highlighted the negative margin years of 2009 and 2012 as examples.
It does not take much of a change in exports to impact prices. In 2012, exports flattened and milk prices dropped.
Gould listed three ways the U.S market recovers — supply decreases, demand increases or government intervention. Global milk supply seems to be rebalancing, he said. All the other major dairy exporters are experiencing negative growth, except in the U.S.
Domestic milk sales can’t be discounted.
“One of the big successes is we benefit immensely from our domestic market,” he said. The domestic market helped to maintain higher U.S. prices because many manufacturers had to rebuild inventory.
Cheese stocks are high, but he believes it is at an inflection point. Butter is more troublesome with record levels in storage. Prices will have to drop to clear butter inventories.
Nonfat dry milk and skim milk powder dropped to a record low this spring. “The joke is that milk powder has recovered 50 percent and we are still broke,” he said.
The European Union has purchased more than 800 million pounds of powder this year to bolster EU prices. Once the market offers a price of $1.30 per pound, the EU will begin to move inventory, Gould said.
Europe’s removal of its quota system has to play out. The timing “could not have come at a worse time,” Gould said. Farmers had plenty of lead time and built up their herd populations in preparation of the quota removal. Some countries, like Ireland, had double-digit growth. The quota removal collided with the global market downswing and Russian trade embargo.
He said the EU is purchasing product and paying farmers to cut production to make the non-quota system work.
The Russian embargo “was quite detrimental to our markets,” Gould said. European companies secured exports with Mexico by undercutting U.S. prices. “They took market share in a country we have NAFTA with,” he said as an example of how far they had to cut prices to move product.
It’s anyone’s guess as to when Russia will lift its embargo, he said. However, its dairy imports would be smaller as the Russian economy has slowed.
New Zealand is more experienced with low milk prices. The country does not have a government bailout for farmers. “When prices come down, (farmers) try to cheapen things” to manage their farm’s financial problems, he said.
Australia’s dairy farmers were left in a lurch this past year as the nation’s largest cooperative changed its mind and dropped the price it would pay farmers. It’s crushed their dairy industry, he said.
“While we are pessimistic here, be glad you are not in New Zealand, Europe or Latin America,” Gould said.
Source: Lancaster Farming
