Dairy producers will likely tighten their belts in 2015, following stellar returns in 2014, according to noted dairy economists with the University of Wisconsin, Madison.
Increased global milk production and decreased demand have put the brakes on exceptional milk prices, said Bob Cropp, professor emeritus, University of Wisconsin, and Mark Stephenson, director of dairy policy analysis at the university, in their December Dairy Situation and Outlook podcast.
Milk production has been strong in major exporting countries, with an estimated increase of 3.9 percent in 2014 over 2013, Cropp said.
Record prices in the U.S. in 2014 were driven by good domestic sales, record dairy exports and restraint in milk production, which increased less than 2 percent in the first half of the year, he said.
But two demand factors combined to soften world dairy imports. China, the world’s largest dairy importer, reduced imports from the first half of the year by more than half, and third-ranked importer Russia banned dairy imports from the EU in early August, he said.
The two countries combined account for 20 percent of world dairy imports, Cropp said.
“You’ve got those two backing off like that, that’s a significant factor,” he said.
U.S. dairy exports have been in a bit of a tough spot with prices out of alignment with competitors, higher in the face of questionable demand in some countries, Stephenson said.
The economists’ price forecasts for U.S. milk have dropped quite a bit from a couple of months ago due to the export situation and what’s happening to the price of cheese, butter and nonfat dry milk, Cropp said.
He’s averaging Class III slightly below $16 for 2015, compared with $23.30 for 2014, and Class IV at $15.50, compared with about $22 in 2014.
Stephenson forecasts an average price of $16.11 for Class II and $13.99 for Class IV.
Both expect the average all-milk price to be down about $7 per hundredweight in 2015.
“Lower feed costs are going to help some, but we’re going to see margins below $8 for farmers; it’s going to be a little tougher,” Cropp said.
“It’s a big price drop, but it’s a price drop from the highest prices we’ve ever had,” Stephenson said.
U.S. exports had been strong, 15 percent to 16 percent of domestic milk production, but October exports fell to 14.4 percent of milk production. Year-over-year exports in October were down 82 percent for butter, 3 percent for cheese, 25 percent for nonfat dry milk, and 9 percent for dry whey, Cropp said.
Meanwhile, he estimates total U.S. milk production for the year will increase 2.3 percent. Good domestic demand and strong exports could handle a 2 percent growth, keeping milk prices in a good range. But additional production will pressure prices given the export situation and building of stocks, he said.
Price for Class III milk, used to manufacture cheese, should come in at about $17.80 or so per hundredweight for December, down from the $24 range in September and October. They could be $16.30 to $16.40 in January, but Cropp’s forecast is for $16.20, then dropping down to the $15s, he said.
By April or May, they could even drop below $15, then possibly come back slowly maybe to the high $16 at best in October or November, assuming exports pick back up in the second half of the year, he said.
As for Class IV milk, used for powder and butter, the powder market has really fallen off, so Cropp is forecasting prices in the $14s for the first half of the year, then back to the 15s and perhaps getting back to the $16s if export markets pick up, he said.
Stephenson forecasts a similar pattern, expecting the worst milk prices in the second quarter, although his Class III prices are forecast higher than Cropp’s through May and Class IV prices a good bit lower than Cropp’s for most of the year – dropping down into the $13 range.
He, too, expects milk prices to recover later in the year based on increased exports in the second half, he said.
“I think that these (product) prices are going to be fairly attractive to people and as long as their economies don’t go bust, that they ought to be looking at these as time to replenish their own stocks,” he said.
“I think we’ll be back fairly heavily in that (world) marketplace fairly soon,” he said.
Source: Capital Press
