The exceptional dairy boom of 2022 was followed by the unavoidable slump of 2023. Although no one anticipated such high milk prices to continue into this year, the pace and severity of the reversal caught dairy farmers off guard. In July, Class III milk fell to $13.77 per hundredweight (cwt.).
Unrelenting development in the Midwest dairy states, as well as additional cheese processing equipment, came at a high price. In the first half of the year, US Cheddar production increased 3.8% above 2022 amounts, but cheese prices fell. Excess milk sloshed across the Midwest, and farmers paid the price with discarded milk, heavily discounted tanker loads, and higher freight expenses.
Simultaneously, global commerce stagnated. Sharp drops in Chinese milk output and a large stockpile of whole milk powder (WMP) enabled Chinese customers to take a step back. Chinese WMP imports fell to their lowest level since 2016 between January and July. With their key consumer absent, other Zealand exporters sought other markets and lowered prices to keep goods moving, replacing milk powder from Europe, South America, and the United States. WMP prices plummeted to a seven-year low in August at the Global Dairy Trade auction. Kiwi processors diverted milk away from WMP and towards skim milk powder and butter, lowering costs for both products.
Fortunately, Mexico’s hunger for American dairy products remained strong. The United States transported 25% more dairy products south of the border in the first half of the year than it did in the same time in 2022.
Domestic demand was also strong. Americans consumed 0.9% more cheese, 7.1% more milk powder, 8.7% more butter, and 10.6% more whey in the first half of 2023 than they did the previous year. Class IV prices were shielded from the brunt of the losses observed elsewhere by robust demand for milk powder in North America and a persistently strong butter market, but they did not escape undamaged. Class IV fell to $17.95 in April after reaching an all-time high of $25.83 in June 2022.
The futures are now trading in the $18-$19 area. That’s better than it might have been, but it doesn’t portend a quick return to agricultural profitability. Further improvement is possible in 2024, but it will be contingent on a combination of slower US milk production and improved export prospects.
Concerns regarding dairy exports
The future of global dairy exports is uncertain. Consumers in Europe are feeling the squeeze of rising costs. Europeans are spending 14% more on food this year than they did last year at this time. They are also paying more for other things, and family finances are being stretched. Some customers may be obliged to purchase less cheese and butter than they would want. If European dairy demand falls short, European exporters will explore other markets aggressively.
South American dairy exporters, such as Argentina and Uruguay, have benefited as a result of high demand from Brazil. However, Brazilian milk supply is increasing, and imports are likely to decline. Argentina and Uruguay have already reduced their milk powder costs in order to attract new customers.
Everything in New Zealand — and the dairy sector in general — is dependent on China. China’s population is aging and declining, implying that dairy consumption would fall gradually. The economy seems to be in poor shape, with high family debt, worrying levels of young unemployment, and low consumer confidence. In the near run, this is expected to curtail Chinese dairy imports.
Chinese milk production, on the other hand, is expanding at a slower rate than it did from 2020 to 2022, and China has most certainly depleted its WMP stocks. Chinese dairy consumption per capita has a lot of space to expand. Long term, Chinese dairy demand is predicted to rise faster than Chinese milk output, offering potential for exporters.
There are less cows in the United States.
The forecast for milk production in the United States is more obvious. The dairy sector is bleeding money, and the herd is dwindling. Milk production dropped short of year-ago levels in July and is expected to do so again in August.
Dairy profit margins fell to their lowest levels in more than a decade this summer. Many farmers incurred higher losses than in 2009 in areas where feed prices were very high or where regional surpluses cut deeply into milk checks. The markets yelled at dairy farmers to increase cull rates, and record-high meat prices emphasized the message. The beef business is cattle short, which will enhance dairy heifer, cull cow, and calf values in 2024 and 2025.
High meat prices are reducing the dairy herd on both ends. When seasonal tendencies are taken into account, dairy farmers are routinely slaughtering more cows than they have since 1986, when the government paid producers to cull their cows and depart the sector. Rising beef prices have also prompted dairy farmers to produce more crossbred beef calves and fewer dairy heifers. Dairy heifer head counts in the United States have declined for seven years in a row, and they will fall again in 2024.
The milk cow herd is contracting and will continue to shrink unless on-farm profits improve. It will be a long time before dairy farmers in the United States have the will — or the cash — to grow. Even yet, a scarcity of heifers will restrict expansion.
There are difficult times all throughout the globe.
Foreign dairy farmers are also feeling the pinch of rising costs and declining earnings. European milk production is higher than a year ago, but pay prices are falling and milk collections exceed last year’s quantities by increasingly narrow margins. While milk production is increasing, cow numbers are decreasing year after year. It is too early to make judgments regarding the 2023-24 season in New Zealand, but growers are disheartened by multiple reductions in predicted pay prices and more stringent environmental rules.
Farm pain has laid the ground for modest growth – or perhaps decreases – in milk output among the world’s biggest dairy exporters. last means that milk and dairy product prices will remain much higher than the agonizingly low levels that afflicted the sector last summer.
If Chinese demand falls short of the market’s already low expectations, milk prices will certainly fall further from their current depressing levels. However, if Chinese imports begin to rise, or if other importers keep up the pace, both Class III and Class IV prices may rise.
Dairy farmers have had a long and difficult year. The next one promises to be much better.
