Global skim milk powder inventories begin this year at the lowest levels since the start of 2015. The last two years have both seen global inventory drawdowns of nearly 200,000 metric tons of skim milk powder, primarily due to the European Union eliminating all intervention stocks. These stocks had kept markets oversupplied for much of the last two years. With overabundant stock levels no longer overshadowing supply and demand fundamentals, skim milk powder and overall milk prices have a better chance of continuing to strengthen in 2020.

Dropped $1,000 per ton
From 2005 to 2014, skim milk powder prices in Europe, Oceania, and the U.S. all averaged above $3,000 per metric ton, with U.S. prices averaging $1.37 per pound. But as stocks began to build in recent years, the averages dropped to around $2,000 per metric ton from 2015 to 2018. This also corresponded with a period when the U.S. All-Milk price averaged $16.88 per hundredweight (cwt.), down from the 2005 to 2014 average of $17.81 per cwt.

As stock levels declined throughout 2019, skim milk powder prices recovered with gains of over 30%. With more manageable stock levels to begin the year and projections for China to import record levels of skim milk powder in 2020, prices should strengthen further, with sharp price gains not out of the question.

In addition to skim milk powder market fundamentals, many other factors play important roles in determining U.S. milk prices. It has been weak U.S. nonfat dry milk prices that have kept a lid on milk prices in recent years. Consider that while U.S. All-Milk prices were 5% lower when comparing the 2015 to 2018 average relative to 2005 to 2014, butter prices were 38% higher, cheese prices were 4% lower, and nonfat dry milk prices were 37% lower.

The shadow is gone
Each year’s supply and demand fundamentals shape up differently to determine market prices. But large stock levels often tend to overshadow current year fundamentals, as abundant supplies in storage mute positive demand news. While this has occurred in recent years for skim milk powder, 2020 begins differently. If global demand remains strong for skim milk powder, and butter and cheese markets continue to do their part, this year could see further gains in U.S. milk prices.

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(c) Hoard's Dairyman Intel 2020
January 6, 2020
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