While milk prices are at or just above break-even cost of production levels heading into 2016, there is hope on the horizon.
That’s according to Tim Hunt, an economist and global dairy strategist with Rabobank. Hunt spoke recently at Dairy Today’s Elite Producer Business conference in Las Vegas.
Lower farm prices around the world mean the supply brakes are being applied globally, plus 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 prices and reduced cash flows, and U.S. milk production might grow just 0.5% next year.
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.
Jerry Dryer, editor of Dairy & Food Market Analyst and Dairy Today’s Market Watch Diary columnist, is a bit more optimistic. He sees a weak first quarter and rebounding prices throughout the rest of 2016.
“The low point for Class III will come in March at $13.45,” he reports. “And there will be a double bottom (February and March) for the Class IV price at $10.88.
“On the other end of the spectrum, Class III will put in its high in November at $19.68; Class IV, in October at $17.69,” he says.
The good news is that underlying market factors are much different now than in 2009, when the last major price crash occurred. In 2009, dairy imports were down almost across the board. That’s because, in large part, capital markets locked up and importers could not finance purchases.
“Demand conditions were also very different in 2009, when the world economy was contracting 2%,” Hunt says. In 2015, the world economy is growing 2% to 3%. So as dairy prices decline, more developing countries are willing and able to purchase products.
And this time, any stockpiled surpluses are now held by private companies, not governments. That impacts how stocks are released to the market. If governments hold stocks, they typically release them slowly so as not to further soften the market. When stocks are held privately, they are released sooner to avoid storage and carrying costs. While that can cause prices to soften temporarily, the pain is less prolonged.
Finally, dairy farmers worldwide will feel the pinch of lower prices. European farmers are seeing sub-$14/cwt milk prices; New Zealand farmers even less. Consequently, world supplies of milk will actually go negative by next spring, which will further erode stockpiled inventories.
