Even though milk prices are at or just above break-even cost of production levels this fall, global supply-demand conditions will likely improve by next summer.
That’s according to Tim Hunt, an economist and global dairy strategist with Rabobank. Hunt was the headline speaker at Dairy Today’s Elite Producer Business conference here in Las Vegas Monday.
“The 2015 global market crash has depressed U.S. exports and pushed down producer returns,” he says. “And if U.S. butterfat premiums erode in coming months, farmgate prices will fall further [in the first half of next year.]”
But he says the supply brakes are being applied globally, and lower world prices are reawakening consumers. The result: “Pricing will likely enter a sustained upward phase in mid 2016,” Hunt says.
The reasons:
• China will likely work through its current inventory of dairy stocks, and Chinese milk production will not keep pace. Lower milk prices in China means small dairy farms are continuing to exit the business, and any new development of large farms has been shelved until much better prices return.
• Current world prices mean New Zealand could see production decline nearly 10% in the first half of 2016 since feeding supplements is no longer profitable.
• E.U. milk production is expected to barely grow at all because of lower milk production, and U.S. milk production might grow just 0.5%
• Current excess global supplies are roughly 5 million metric tons, which is about the annual milk production of the state of Idaho. Even so, it represents just three weeks of international trade.
• “Lower milk pricing will help unlock additional consumption, eroding those international stocks,” he says.
• There could, of course, be some hiccups along the way. “European Union quotas and Euro currency valuations could result in more milk than we are expecting, or there could be further struggles in the global economy,” Hunt says. But at the same time, a strong El Nino this winter could cause problems in New Zealand and lower its production even further.
