U.S. dairy farmers’ big bet on global demand for milk is souring.
The industry was in trouble long before a trade squabble with Canada last month that reduced demand for ultrafiltered milk, a cheese ingredient. Dairy farmers fear a spat that has jeopardized roughly $150 million in sales for Wisconsin, New York and Minnesota producers is just a prelude to disruptions to come if President Donald Trump renegotiates the North American Free Trade Agreement as promised.
“There was a perfect storm,” said Jaime Castaneda, senior vice president of trade policy at the National Milk Producers Federation.
Dairy farmers aggressively expanded their herds three years ago when milk prices were driven up by growing demand from middle-class consumers in North America, Asia and other markets. By March, there were 9.4 million commercial dairy cows in the U.S., a 20-year high, according to the Agriculture Department.
But China, Russia, Venezuela and other importers scaled back their dairy purchasing in recent years due to domestic troubles. The European Union, meanwhile, greatly increased its dairy production after lifting 30-year-old quotas in 2015. Then came a world-wide surge in agricultural production that has pushed down prices for grains and meat as well as for dairy.
The dollar has also been on a multiyear climb, making U.S. exports less competitive. Milk prices have plummeted by a third in the past two years, USDA data shows. The value of U.S. dairy exports fell to $4.8 billion last year, down 50% from 2014.
Milk prices in March stood at $17.30 per hundred pounds, the USDA said, down $1.20 from a month earlier. That industry benchmark is an average of prices farmers receive and is based on a variety of dairy products including butter, cheese and skim milk powder.
Commodities markets like dairy are prone to booms and busts because of the long lead time to ramp up supply. But the current glut — and the accompanying downswing in exports — may pose one of the biggest challenges yet to the U.S. dairy industry.
“A lot relies on exports, and that’s why swings are such a big deal,” said Ben Laine, an economist at CoBank Acb, an agriculture cooperative bank. “That’s where any surplus goes.”
The glut is likely to grow this spring, the most productive time of the year as temperatures rise and days grow longer. An unusually mild winter started this year’s milking season months early at some dairies, further contributing to the milk crush.
“You can’t turn the cows off,” said Ken Nobis, president of a dairy cooperative in Michigan, where the busy season started three months early.
In a recent interview, Agriculture Secretary Sonny Perdue said renegotiating Nafta could improve access to Canada for U.S. farmers. “We’re going to try and balance the scorecard in a number of ways,” he said.
Tom Vilsack, agriculture secretary during the Obama administration and current president of the U.S. Dairy Export Council, urged the Trump administration to find new foreign buyers for American milk.
“To keep pace with those efficiencies in productivity, we have to look for additional markets,” Mr. Vilsack said.
Meanwhile, U.S. dairy products are piling up. The U.S. has more than 800 million pounds of American cheese in reserve, the most since 1984, according to the USDA. The amount of butter in reserve totals 272 million pounds, the most since 1994. Some U.S. farmers are dumping millions of pounds of excess milk onto fields. In the Midwest and Northeast, nearly 78 million gallons of milk have been dumped so far this year, up 86% from the same period last year.
Lawmakers from Wisconsin and New York are asking the USDA to buy excess cheese again. Last year the agency spent $20 million to purchase cheese from private inventories for food banks and pantries.
The USDA already spent all authorized funds to buy up excess dairy this fiscal year, but the new request is under consideration, an agency spokeswoman said.
Some big purchasers like Dean Foods Co. say they don’t even try to predict milk prices anymore.
“We learned our lesson back in 2014,” said Chief Financial Officer Chris Bellairs, referring to a year when spiking milk costs drove losses for Dean. “The market was volatile, and it remains that way today.”
To cope, farmers need to stop expanding their herds, said Mark Stephenson, director of the Center for Dairy Profitability at the University of Wisconsin-Madison. “That’s something we don’t want or need, ” Mr. Stephenson said.
Source: Market Watch
