Does the world need more or less milk?
Eric Meyer is president of HighGround Dairy*, Chicago, a firm which specializes in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.
As global market participants gather this week in Chicago for the 2017 American Dairy Products Institute Annual Conference in Chicago, I would like to pose a simple question for the industry to consider: Does the world need more or less milk?
I asked this question to several attendees at the Wisconsin Cheese Industry Conference in Madison earlier this month and received a unanimous answer: LESS! And from their position in the marketplace, that answer seems obvious. CME spot cheese prices have been stuck in the $1.40s with the vast majority of product trading there originating from the Midwest. U.S. Cheddar production has been rocketing higher, up nearly 11 percent in February from the prior year. Another mild winter combined with inexpensive feed should lead to another strong “spring flush.” And the big story over the past month has been Canada “diafiltered milk” imports which prompted Grassland Dairy Products to sever ties with 75 dairy farms as of May 1. There has been an oversupply of raw milk relative to plant capacity in Michigan for the past couple of years that has spilled over into Wisconsin, both problems without a near term solution. The situation in the Upper Midwest seems dire.
If we asked those involved in marketing nonfat dry milk or skim milk powder (SMP), their answer would likely be the same. Prices remain mired at historic lows across the world and reported public and private inventories remain extremely burdensome. Even though European milk production will have declined versus the prior year for 10 consecutive months (June 2016 through March 2017) and the EEX SMP price index rallied to as much as 27 percent above Public Intervention levels (1,698 per metric ton) just three months ago, product has begun heading back to government warehouses. Of the 772 million plus pounds still in Intervention warehouses at the end of 2016, only 40 metric tons were sold back to the industry!
The United States is also on edge because in February, President Trump tweeted an idea to combat the “horrible NAFTA policy,” citing that a 20 percent border tax with Mexico would solve the problem AND pay for that border wall. Yikes. The United States exported nearly 540 million pounds of NDM/SMP and 639 million pounds of cheese to Mexico in 2016. Mexico is by FAR our largest trading partner. Oh, Canada also has begun exporting its excess skim solids and competing in similar markets to the United States. It is hard to see how the industry can break through this slump. Less milk would do the trick, right?
But let’s look at two commodities that are or have been showing signs of life. First, global butterfat prices have been on the rise since last spring when Europe nearly sent product into Intervention. Since then, prices have risen nearly 84 percent (in Euro terms). Fonterra’s New Zealand butter and anhydrous milkfat prices have also been on a consistent path higher and recent GlobalDairyTrade (GDT) values for Contract 2 butter are 82 percent above last year. Except for a few brief moments over the past three years, U.S. butter prices have been sharply higher than its competitors. But this past week, Chicago Mercantile Exchange spot butter remains more than $2.00 per pound and is now the cheapest fat in the world. While domestic supply/demand fundamentals suggest the butter market has the potential for more downside, how far can it fall before the world comes calling?
Then there is whole milk powder (WMP), the largest tradable dairy commodity in the world by volume. New Zealand dominates export market share WMP (59 percent in 2015) and production struggled there in the fourth quarter last year. October-December 2016 milksolids collection was down 4.9 percent versus the prior year. Higher commodity prices in the fourth quarter led to a rebound in production in early in 2017 but over the past two weeks, New Zealand has been battered by two cyclones, prompting some farmers to make an early exit for the season and have a potential negative impact to the upcoming one. Along with improving demand from New Zealand’s largest WMP customers, the risk to future supply has prompted another rally above $3,200 per metric ton for June delivery at the last GDT auction.
Whey protein is another commodity group that has shown significant growth over the past year. U.S. dry whey prices have more than doubled versus the prior year (USDA monthly announced) and whey protein concentrate 34 percent prices (USDA Dairy Market News mostly midpoint) are up 57 percent from the prior year. While these markets are starting to flash weakness, the correction would need to be extreme to have a materially negative impact on the overall milk price.
And when rolling the overall dairy commodity pricing data back into a farmgate milk price, the numbers are still favorable for production expansion across the world. EU’s Milk Market Observatory is reporting March weighted average raw milk prices at 33.42 cents per kilogram in March, up 30 percent from last June’s lows. NZX’s latest Fonterra Milk Price Futures contract last traded at NZ$6.05 for the 2016/17 season and $6.25 for the 2017/18 season (per kilogram of milksolids, April 20 settlement), both profitable levels for most Kiwi dairy farmers. And then there’s U.S. milk prices with April Class III poised to settle above $15.00 per cwt. and Class IV near $14.00. While not great levels on a historical basis, they are 10 percent above last year and feed costs are even cheaper than they were last year. These are not devastating markets to dairy farmers by any means.
To conclude, it appears the world is still in need of butterfat, whole milk powder and whey protein while clearly needing less skim solids and maybe less cheese. And when it boils down to how the world calculates a farmgate milk price, the market is asking most farmers to produce more, at least for now. Unfortunately, this leaves targeted regions of the world like the Upper Midwest and parts of Europe to figure out what do to with all the excess milk that cannot be turned into WMP and butterfat.
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