Growth in milk production in the major exporting regions is expected to slow to a trickle in the first half of 2019 to less than 0.5 percent, bringing some recovery in milk prices.
But there’s a lot of uncertainty in world markets, according to Rabobank analysts.
“I think we’re going to be better than ’18, which is no great shakes, but I don’t think we’re going to be as high as we were in ’17,” Mary Ledman, Rabobank global strategist, told Capital Press.
Rabobank is forecasting no more than a $1 per hundredweight increase in the Class III milk price, bringing the average in 2019 to $15.55, she said.
Markets are poised to move higher, but there’s a lot of uncertainty, including Brexit in the EU, economic instability in South America and trade wars in the U.S., she said.
“China is the real wildcard for trade,” she said.
The trade war with the U.S. has resulted in devaluation of the Chinese currency and lessened its purchasing power. As a result, Rabobank lowered its forecast for Chinese dairy imports in 2018 from an increase of 14 percent to an increase of 8 percent, she said.
The positive news is that China has depleted its stocks, and imports should be up 11 percent in 2019, she said.
An improvement in prices can’t come soon enough for U.S. dairy producers, but it’s not going to be as much as they’d like. A $17 Class III price is not in the forecast, she said.
The last three years have been brutal — especially for smaller dairy producers, who have faced headwind after headwind, Tom Bailey, Rabobank senior analyst, said.
While the new farm bill will help smaller producers still in business, there are challenges ahead. Demand hasn’t been great for domestic retail sales. Natural cheese was the only category to increase year-over-year sales in November. All the others, even butter, continue to contract, he said.
Foodservice sales continue to grow, however. While those sales reports don’t break out dairy, total sales were up 7 percent in October year over year and would include a lot of natural cheese, cream, butter and whey in the form of baked goods, he said.
Domestic disappearance has contracted marginally, but Rabobank expects it to grow 0.5 to 0.8 percent in the next 12 to 18 months if economic shocks don’t change things, he said.
Exports are doing well, even with the fallout from China’s retaliatory tariffs. But they could face headwinds with the appreciating value of the dollar, making the U.S. less competitive compared with the EU and New Zealand, he said.
In addition, the economic climate is worrisome. The U.S. is overdue for a recession based on historical data, and there are warning bells going off, he said.
The S&P has declined 15 percent in the last two months, oil prices have dropped 37 percent in the last two months and the Treasury two-year and 10-year yield curve is inverted — which is typically a precursor for a recession, he said.