Slowing milk production and strong exports should be painting a positive picture for U.S. dairy, but talk of trade wars with Mexico and China seem to be weighing on dairy markets, according to economists at the University of Wisconsin.
U.S. milk production is staying below a 1 percent increase year over year, which is going to help tighten supply, Mark Stephenson, the university’s director of dairy policy analysis, said in the latest Dairy Situation and Outlook podcast.
“...We’re still carrying historically high inventories of product, but I don’t think it’s alarmingly large,” he said.
Fellow economist Bob Cropp agreed: “There’s plenty there but at least it’s not a growing problem.”
On the export side, the latest data show record shipments, with milk powders up 37 percent and cheese up 22 percent. April exports represented 18 percent of U.S. milk production.
“That’s pretty significant,” Cropp said.
That’s a big number, but there are concerns, Stephenson said.
“We’ve been rattling the saber pretty hard with trade, and we’ve gotten some blowback back into dairy,” he said.
U.S. tariffs on steel and aluminum imports from Mexico drew threats of retaliatory tariffs on U.S. cheese of up to 25 percent. U.S. tariffs on a number of imports from China also resulted in threats of counter-tariffs on a slew of U.S. products, Cropp said.
The tariffs have not yet taken effect, but dairy futures have deteriorated in what he thinks is an overreaction to the announcements, he said.
Stephenson also thinks the markets have overreacted.
“But I didn’t expect them not to react at all,” he said.
USDA is still forecasting pretty robust export markets this year. But product prices have dropped since the first of June, and Class III milk futures are in the $15s per hundredweight. In May, October futures were about $17, Cropp said.
“So everything has really reacted downward,” he said.
Absent any of the trade war discussions, most of the fundamentals would have supported the $17 milk price, Stephenson said.
“We haven’t actually had anything take place. We haven’t had products that have been rebuffed or anything else from high tariffs. This is just in anticipation that it could happen,” he said.
Domestic sales have been pretty good. Stocks aren’t burdensome and will come down. Exports are record high, and milk production is only increasing slightly. World prices are holding, and U.S. products are competitive, Cropp said.
“All bodes well for higher milk prices, but we’ve had this reaction right now — everything downward,” he said.
Without the discussion of trade wars, there would be some real opportunity for the dairy industry both this year and on through 2019, Stephenson said.
“I think we could see prices strengthen,” he said.
Cropp said he thinks Class III milk prices are going to be in the $16s by fall and he wouldn’t rule out $17.
Milk production isn’t forecast to pick up strongly, and domestic demand is pretty good, he said.
“So the big question is that trade situation,” he said.