Milk production has slowed in the U.S., but retaliatory tariffs by China and Mexico are weighing heavily on dairy prices.
Milk production in June grew 1.2 percent year over year. Normally if exports hold up, that amount of growth would be bullish for prices, Bob Cropp, dairy economist with the University of Wisconsin, said in the latest Dairy Situation and Outlook podcast.
In addition, milk production only increased .9 percent in May and .4 percent in April, he said.
Nevertheless, cash prices for barrel cheese have fallen 20 some cents since early June and cash butter prices have dropped 15 cents.
“It appears that maybe both domestic buyers and international buyers backed off some. Even though these retaliatory tariffs did not take place until early July, I think they were anticipating this is going to have an impact on exports,” he said.
In May, Cropp forecast Class III milk prices would be in the high $15s per hundredweight in July, high $16s later in the year and maybe even $17. But it looks like July prices are going to drop to $14.20 to $14.25, he said.
“So the markets are reacting to this,” even though April saw record exports and May saw the third-highest exports, he said.
Cheese exports dropped about 15 percent in May, however, with cheese exports to Mexico down about 35 percent. And there’s word some cheese companies have had orders canceled or not renewed, he said.
“So it’s starting to have an impact,” he said.
“I think a lot of these things are starting to have an impact,” Mark Stephenson, fellow University of Wisconsin economist, said.
Lenders are indicating it’s getting tough out there in dairy land. The mailbox price for Michigan dairy producers in May was below $14 a hundredweight, he said.
Tariffs vary, but putting a 25 percent tariff on cheeses raises the price 40 cents per pound, the economists said.
“That’s really taking us out of competitive range in a number of countries. So to be competitive, prices have to fall considerably or we have to find new export opportunities where we don’t have tariffs,” Stephenson said.
“It’s just not going to be an easy thing to do; it’s going to be costly,” he said.
Without the retaliatory tariffs, the U.S. was competitive with the EU and New Zealand in the Mexican and Chinese markets. The tariffs don’t necessarily mean exports will go to zero, but it doesn’t take a big drop for those products to back up on the domestic market. And it would take quite a drop in price to move them domestically, Cropp said.
The futures markets have already factored in the impacts on trade and seem to have backed off a bit in the outlying months, Stephenson said.
Class III milk futures are back to $15 in August and up to $15.75 by September.
Cropp said he thinks there will be a recovery in milk prices, but they’ll still be about $1 per hundredweight lower than year-earlier levels, he said.