Cautious optimism for dairy markets

By Sara Dorland, managing partner, Ceres

We are just a few months into 2019 and world dairy markets are already at a crossroads.

As market participants stand at the proverbial fork in the road, one path takes markets higher with an outlook and future that is rosier than 2018, and the other appears a bit more treacherous for prices with short-term bouts of weakness or simply a very flat trajectory with prices not gaining much strength.

Several geopolitical events could cause markets to pitch to and fro this year, so much so that even this seasoned veteran is skittish on making long-term prognostications. Rather, let’s look at the signposts that suggest higher or lower markets.

There are several reasons to be more optimistic about the prospects for 2019 compared to the end of 2018. Global milk supply growth appears to be slowing. While it is unlikely that milk production spends considerable time below prior year levels, the sizeable year-over-year increases since 2014 may be in the rearview mirror, at least for now.

When milk supplies slow, stocks tend to decline as buyers look to surpluses to backfill reduced output. The European Union (EU-28) held the largest stockpile of dairy products in the form of skim milk powder (SMP). As of the end of January, the EU-28 committed 99 percent of its SMP stocks. Still, it could take through the second quarter this year to deplete the inventories. But, since 2015 the EU-28 SMP has created a ceiling on markets, a deterrent to higher prices that should be removed by mid-year. Finally, China’s milk powder imports in 2018 outpaced the prior year suggesting that demand from the world’s largest dairy importer could be rising again.

However, the potential price recovery in 2019 is not without its hazards. There are several issues creating a headwind for U.S. exports, and that is causing domestic stocks to build as the U.S. market is unable to absorb the lost opportunities.

Retaliatory tariffs from Mexico and China are starting to slow U.S. exports of cheese and whey. Since July, U.S. exports of whey to China have declined with imports from Europe offsetting lower imports from the United States. Over the past decade, U.S. cheese exports to Mexico grew at a compounded annual growth rate of 11.3 percent making 2018 exports through November down 0.6 percent a clear indication of a growing problem. Had U.S. cheese exports to Mexico maintained trend, that could have accounted for nearly 11 million pounds of additional sales.

Lastly, there is more government money available to U.S. dairy farmers this year compared to last year thanks to the revamped Dairy Margin Coverage (DMC) program, formerly the Margin Protection Program, and Dairy Revenue Protection (DRP). Both DMC and DRP programs are providing dairy farmers with the opportunity to buffer lower prices. Should the programs succeed, that could mean more milk in the system, and that tends to work against higher prices unless there is a commiserate increase in demand.

Based on the current markets, it seems dairy could be headed down the path toward prices that may be better than 2018, but the road is not without its potholes and hazards. That should provide a reason to be cautiously optimistic as we continue into 2019.