Global dairy markets continue to teeter on the edge of profitability. This is causing concern for some in the industry and is fueled by uncertainty over mounting trade tensions, ever-growing milk flow, and feed prices that look to increase. As a result, Rabobank’s recent rural confidence survey of Oceania farmers showed producer confidence reverting to negative territory as they ponder their near-term future.

U.S. farmers are also facing difficult times as the U.S. All-Milk price dropped to $15.30 per hundredweight (cwt.) in February, marking the lowest level in nearly two years. Feed prices are moving in the opposite direction with corn futures trading above $4 per bushel through most of 2018 and into 2019 . . . the first time since 2014.

A small pricing rally developed in early March as Class III milk futures moved above $16 per cwt. along the 2018 price curve. The rally has been driven by record-high U.S. exports in February (on a daily basis), moving up 20 percent along with strong domestic demand for cheese. However, the escalating prices have been met with skepticism as the looming Northern Hemisphere spring flush is likely to dampen milk prices during the second quarter.

Tom Bailey
Executive Director & Senior Dairy Analyst for Rabobank
The U.S. herd currently stands at 45,000 head above last year. The cow numbers, in tandem with above-trend milk per cow yields, propelled U.S. milk production 1.8 percent above last year. In Europe, year-over-year output grew by 4 percent versus a low comparable but exceeded the prior year by 1 billion pounds.

Chinese buyers have done most of the heavy lifting regarding global imports, which were 20 percent higher in the first two months of 2018. China’s double-digit expansion in imports was largely due to lower year-over-year milk production (down 1.6 percent in 2017) caused by a long, hot summer. The U.S. accounted for 5 percent of the growth, with exports to China up 16 percent in liquid milk equivalent terms.

However, the robust year-over-year gains during the first two months of the year could vanish if a trade war between the U.S. and China comes to fruition. It has been a bumpy road for the markets as President Trump demonstrates his negotiation brinkmanship.

President Xi announced a move toward a broader opening of the Chinese market to the U.S. following a tit-for-tat battle that included $50 billion in tariffs exchanged between the U.S. and China followed by a further $100 billion in tariffs on Chinese imports from the U.S. — none of which have yet been implemented.

Dairy has not explicitly been named, but if it were to be included, it could be detrimental to U.S. prices. In 2017, China accounted for 45 percent of U.S. whey product exports. If the U.S. lost China as an export destination, a 5-cent per pound drop in the U.S. dry whey price is not out of the question. This would have a ripple effect of 30 cents per hundredweight on the Class III milk price.

As it is, dry whey prices are about 20 cents lower than last year, due in part to aging European government-held skim milk powder stocks anticipated for use in the animal feed sector. Fortunately, it appears the U.S. and China both realize there is a greater incentive to find agreement than fighting a costly trade war.

Farm-level margin pressure faced by producers around the globe is expected to stymie year-over-year milk output growth. Gradually slowing rates of growth, led by the EU and the U.S., will bring the market into balance. As a result, combined year-over-year milk supply growth for the Big 7 (the U.S., EU, Argentina, Brazil, Uruguay, New Zealand, and Australia) is expected to all but cease as we make our way into 2019.

Meanwhile, Rabobank sees global economic growth accelerating through 2018, which will support demand growth for dairy products. We anticipate Chinese imports to again expand in 2018, growing by approximately 14 percent. Anecdotal evidence suggests that consumer demand in Southeast Asia remains robust. U.S. dairy product demand is also expected to expand by around 1.3 percent.

In summary, 2018 likely will encounter greater pricing volatility. In the short term, the market appears to be overpriced with downside price risk, ultimately pulling supply growth to a trickle by late 2018. The growing global economy is buoying demand growth for dairy products. When combined with slower supply growth, it is expected to rebalance the dairy markets and put dairy producers back in profitable territory by year-end.