Milk production in major dairy-exporting countries this year is lower than in 2018, and further contraction is expected in New Zealand and Australia.
“Tightening milk supply, reduced stocks and price stability continue to be the key themes permeating across global dairy markets,” Rabobank analysts said in their latest dairy quarterly report.
“Production has leveled out and given demand a chance to catch up,” Ben Laine, a RaboResearch analyst, told Capital Press.
The situation is supportive of prices this year if not into next year, he said.
In the U.S., milk production has been relatively flat and tightened the supply. Butter stocks have pulled back toward normal, and record cheese inventories at the start of the year have flattened. There was less of a spring flush, so there’s been less excess milk going into butter and powder production, he said.
“Demand has still been going strong and production slowed; fundamentals are pretty supportive,” he said.
The same is true on the global front, but the optimism in markets comes amid chaos, the analysts reported.
It’s an era of so much trade disruption, tariffs, trade wars and unpredictable policy, as well as the African swine fever epidemic in China and feed concerns in the U.S. due to late plantings, Laine said.
“Turbulent is the new normal, but there’s more strength than we’ve seen in a while,” he said.
Based on the futures markets, milk prices are expected to pick back up in the next few months, and producer margins should be improving, he said.
The U.S. feed situation could affect those margins, and there are always other factors, such as labor costs, he said.
“Right now, prices are pretty good and markets are pretty optimistic,” he said.
Futures prices for Class III milk (for cheese manufacturing) are $2 to $3 a hundredweight higher than they were a year ago, brushing up against $18 for September and October, he said.
A lot of that is driven by tightening inventories of cheese, good demand and slower production, but it’s still held back by troubled whey exports, he said.
Whey is a byproduct of cheese and a component of the Class III price.
China is a big market for U.S. whey, which is used in pig feed. U.S. exports of whey to China were first hit by retaliatory tariffs, but African swine fever has had a bigger effect. Chinese demand is down significantly, and the EU has taken more of the market share, he said.
Shipments of U.S. whey to China were down 67% in May year over year and the lowest monthly volume in nine years, according to the U.S. Dairy Export Council.
In the broader picture, Rabobank expects a modest milk supply in the major exporting countries in the second half of the year.
“However, the milk supply tap is slowly being turned on,” the analysts said.
They expect growth in the global milk supply will begin in the third quarter of the year and accelerate into next year. But that rate of growth is forecast to remain below 1% until the second quarter of 2020.