For the dairy industry, 2018 begins with extremely high levels of dairy products held in storage. While the amount of butter and cheese in cold storage is certainly large relative to recent history, it is perhaps the trajectory of nonfat dry milk stocks that is most troubling. This product grew by more than 76 million pounds (34 percent) during 2017, according to the most recent USDA Dairy Products report published on January 4.

Although nonfat dry milk stocks remain well below the levels posted in the early 2000s, they registered their highest reading since September 2009 this fall. This product accumulation has factored heavily into rather pessimistic price forecasts for nonfat dry milk for 2018. USDA’s December outlook pegged 2018 prices in a range of 74.5 to 80.5 cents per pound. If those prices are realized this would indicate that powder prices will be at their lowest annual average in at least 30 years.

Products building elsewhere
It is not just the U.S. that has been accumulating product. Stocks of skim milk powder in the European Union will begin 2018 more than double the levels found in the U.S., near 850 million pounds. These two major export regions account for well over half of world nonfat dry milk stocks as tracked by USDA’s Foreign Agricultural Service.

So while it is true that cheese and particularly butter demand continue to be bright spots for the milk price outlook this year, concern is mounting. Unless market demand for growing supplies of skim milk powder accelerates, milk checks will be held back even as butter and cheese prices remain historically strong.

Mexico and China are the largest importers of skim milk powder. While Mexico has continued to grow imports in recent years, China purchases are struggling to return to the levels from 2013 to 2014 following declines in 2015 and 2016, which were one factor in the aforementioned worldwide stock buildup.

With the U.S. exporting over half of its nonfat dry milk production, and historically high butter prices drawing more milk into butter/nonfat dry milk production (the two products are directly related), world demand for skim milk powder will be an essential piece to U.S. milk price strength in 2018.

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(c) Hoard's Dairyman Intel 2018
January 8, 2018
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