International dairy prices increased from already high levels in the three months leading to mid-December and are expected to remain strong through at least the first half of 2014, according to a new report from Rabobank.

Producers in most exporting regions have responded to larger margins by increasing milk production, which has boosted export supply since September. That increase has largely been soaked up by China’s vigorous buying, leaving less product to go around and resulting in high international prices that have sidelined some buyers.

With export supply only in the infancy of recovery, China mopping up whatever increase has been available and other buyers almost desperate to secure more product, Rabobank predicts 2014 will launch with exceptionally strong dairy product prices and extremely strong to record farm gate milk prices.

Strong milk prices and falling feed costs have already increased milk production in many exporting regions and will fuel more, but prices are expected to hold around current levels before easing in mid to late 2014 as inventories are replenished.

While exporting regions increased milk supply a total of 3 percent year over year in August and September, that response has been delayed in the U.S. Milk production here grew just 1 percent year over year in the September-October period.

Several factors are keeping the reins on U.S. production, including forward contracting of feed at higher prices and poor forage quality, the report states.

The December U.S. all-milk price is expected at or above $21 per hundredweight and feed costs are expected to be down 30 percent from their March highs.

Positive margins between milk price and feed costs were historically associated with milk supply growth of 3 percent to 3.5 percent. But Rabobank expects the U.S. response to be less vigorous even when the temporary supply drags have passed, rising only 2 percent in both the first and second quarters of 2014.

Rabobank analysts say following a period of losses, many U.S. producers are looking to build equity.

Among those who do want to invest, bank financing is not as readily available as it previously was. Uncertainty regarding immigration reform is also affecting an appetite to invest. Some of those who are investing are buying more ground to grow more of their own feed, rather than investing in cows and sheds, Rabobank stated.

Even with a relatively modest rate of supply growth and improved domestic dairy demand, as the economy continues its slow recovery, U.S. processors have the wherewithal to launch another major push into export markets in the first half of 2014.

With more exportable supply internationally, prices will ease in the second half of 2014. But the extent of that easing will be limited by higher demand, assuming the world economy remains on a slow recovery track, the report states.

The world price situation could be positively influenced by adverse weather during peak milk production season in the Southern Hemisphere in the first quarter and in the Northern hemisphere in the second quarter. In addition, China’s import growth could exceed Rabobank’s estimates and Venezuela, which slashed its purchases from the world market in 2013, could return to the market.

On the downside, the U.S. milk supply could respond more strongly than anticipated, and emerging markets (other than China) might not come back to the market with the same force as anticipated.

Recommended for you