2020’s Improved markets face bumpy ride

By Sara Dorland, managing partner, Ceres

Dairy markets have turned the corner for the better, but this year will not be without bouts of volatility and occasional downturns.

While it would be hard not to argue that this year’s dairy markets are starting from a much better position than last year, seasonal milk production increases in the Northern Hemisphere could still weigh on prices into the second quarter. Last year, January Class III and IV milk prices were $13.96 and $15.48/cwt., respectively. That compares to January 2020 Class III and IV prices of $17.05 and $16.65/cwt., sizeable improvements that will be warmly welcomed when they hit mailboxes throughout the country. However, more milk than a year ago and unsettled markets could make 2020 a rather bumpy year.

As this year unfolds, the United States is well positioned to take advantage of new trade arrangements that, over the long run, provide more opportunities for exports, especially cheese. At the end of last year, the Trump administration inked deals with Japan and China that will roll back protective tariffs helping to level the playing field for U.S. dairy. That said, higher domestic prices relative to the world and a strengthening U.S. dollar could pare back some of these improvements.

Still, U.S. markets are optimistic regarding the prospect of gaining new markets for cheese, butter and milk powder. Last year, Japan was the world’s largest importer of cheese and the island nation imported 10 percent of that product from the United States. In spite of higher spot prices in the fourth quarter — the first quarter following the signing of the deal — Japan imported nearly 3 percent more cheese from the United States compared to the same period in 2018.

Flat milk production also contributed to higher milk and dairy product prices at the start of this year. Last year reflected the slowest year-over-year milk production growth for the United States since 2009, and the country was not alone in posting tepid growth. Combined the EU-28, Oceania, Argentina and Brazil expanded 2019 milk production a scant 0.2 percent compared to 2018. Oceania’s milk production has continued to sputter as severe drought limits pasture growth, but the United States and Europe returned to positive output in December. This coming year, milk production is expected to resume normal levels of growth, and given current demand, a return to trend growth should not overburden markets.

Although there are several reasons to be optimistic about prices in 2020, a few areas of concern remain. Currently, the spread of coronavirus has global markets, including dairy, concerned that the advance of the outbreak and China’s slow response to dealing with the crisis have already started to take a toll on the global economy. South Korean President Moon Jae-in announced his government would need to step up measures to support the nation’s economy because China, South Korea’s largest trade partner, is unable to ship parts and has pulled back on imports. That is consistent with Apple providing earnings advice that sales and phone assembly have slowed and that stores in China remain closed.

Not surprisingly, China, the world’s largest dairy importer, is currently preoccupied with managing coronavirus. Because China is such a large buyer of milk powders, when it slows purchases, the global dairy market has to adjust supply — no other country can absorb the extra volume. Currently, markets are unsettled and waiting to see how bad the full impact of coronavirus will be, and that is causing prices to retreat for now.

Thus, while markets are much improved from last year, areas for concern persist, including high domestic prices, a strong U.S. dollar and the spread of a virus that could temper recent enthusiasm. This is not to say that markets are not on the mend — they are. But 2020 could be another bumpy ride.