Milk prices have remained in a fairly narrow range thus far in 2018, with the monthly low of $15.30 per hundredweight (cwt.) registered in February and the high of $16.30 per cwt. posted in June. Early in 2018 there was optimism that U.S. milk prices would move higher in the second half of the year, as it was expected that stronger demand, especially export demand, and lower milk supplies would give a boost to prices.
Perhaps the time has come to recognize that it is going to take a notable shift in one of three areas to move U.S. milk prices significantly higher:
1. A slowdown in U.S. milk production
2. Stronger domestic demand for dairy products
3. Stronger U.S. dairy exports
Milk supplies have remained stubbornly strong in 2018. August milk production was 1.4 percent higher than the previous year after registering a much lower growth rate of 0.5 percent during July. A 5,000-cow gain in Texas from July to August shows that despite financial challenges that are apparent in many parts of the country, some producers continue to expand their operations.
Aggregate U.S. milk supply has grown despite an apparent acceleration in the loss of dairy farms due to poor margins. It seems as though this trend of stronger than expected milk supply could continue for the foreseeable future as expansion by lower cost operations occurs at a faster rate than other operations exit. With an additional 2 billion pounds of U.S. milk production expected for 2019, there is little hope that supply side changes will allow milk prices to head significantly higher in 2019.
The old adage of “the cure for low prices is low prices” still holds true. It will just take longer to occur as more of the nation’s milk supply has production costs in a range that allows for continued expansion at current price levels than prevailed several years ago.
STRONG, BUT COULD BE BETTER
Further dampening the price outlook is the fact that domestic stocks of cheese remain large. Cheese stocks reached record levels in July and have been higher than year-ago levels for 46 consecutive months. Domestic other cheese disappearance has grown by 2.8 percent in the first seven months of 2018 after a slight decline over the same period in 2017. However, American cheese domestic use has expanded by only 2.4 percent for the first seven months of 2018 relative to a 5.4 percent growth in the first seven months of 2017.
Butter stocks are slightly above year-ago levels despite a 2.8 percent increase in domestic butter use for the first seven months of 2018.
Fluid milk sales continue to struggle with another decline of 2.1 percent for the first seven months of 2018. Although not as important to overall use as several years ago, further declines in fluid milk sales continue to keep pressure on milk prices.
Domestic use of skim milk powder and nonfat dry milk has struggled in 2018 with a decline of 130 million pounds for the first seven months of 2018 relative to a year ago.
TRADE MATTERS
Exports of U.S. dairy products have grown this year, even as growing milk supplies from other countries and higher tariffs placed on U.S. dairy products by China and Mexico have tempered the enthusiasm for trade.
A 20 percent increase in U.S. dairy product exports on a milk equivalent skim solids basis has been supportive of U.S. milk prices, even though global milk production growth and stocks of dairy products appear sufficiently large given current use rates.
The new USMCA (United States, Mexico, and Canada) agreement that would eliminate the current Class 7 milk category in Canada will help bolster U.S. exports of milk powder but will likely not be large enough to generate a major move in U.S. milk prices.
The analysis of the current U.S. dairy situation shows that there is little momentum that would substantially strengthen U.S. milk prices, confirming the narrow range that milk prices have remained in thus far in 2018.
UNCERTAIN MARKET SIGNALS
However, there are several wild cards that must be considered when an outlook for milk prices is constructed, any of which could substantially alter the “more of the same” situation described above.
Feed costs are one of these wild cards. Corn prices remain at some of the lowest levels seen in several years. Another large corn crop harvest expected this fall is causing stocks to continue to grow.
While a short crop next year could elevate corn and feed prices in 2019, large stock levels will keep a repeat of 2012 very unlikely. If difficult growing conditions in 2019 were to cause corn prices to increase to $5 or higher, it would quickly pull down the growth in milk production and raise milk prices.
A reduction in Chinese tariffs on U.S. dairy products would also provide a lift to U.S. milk prices quickly. Projecting when the current tariff escalation between China and the U.S. will come to an end is difficult, however, and current news suggests it could take a while before that might become a possibility.
A major disease outbreak that reduces milk supplies or some new demand for a dairy-related product are also wild cards that could move the outlook for milk prices to much higher levels, but both of these alternatives seem rather remote at this point.
MORE OF THE SAME?
It appears that U.S. milk prices experienced in 2018 may be a new normal moving forward. That’s because many of the possible wild cards that could significantly lift prices seem not all that likely.
I do expect milk prices will average slightly higher in 2019, though not to the extent that many producers are hoping for. However, in a market with inelastic demand like dairy, it often doesn’t take much to move markets considerably.
