Feed Prices & Dairy Farm Margins

Summary: Milk production growth continued in Europe and the US to start the year, but signs point to a slowdown by mid-year as lower milk prices push farm margins to break-even or below.    

Milk production in the US was up 1.8% vs. year ago in February – the 2^nd consecutive month of solid gains. States in the Southwest once again led the way with growth in milk output. California grew 3.5% - the highest rate since July 2014. The Northeast was weak while the Upper Midwest posted only modest growth. Cow numbers continued to move higher in February despite worsening on-farm economics. However, the pace of culling appears to be picking up in March with the third week seeing a 22% increase vs. year ago. If this continues, it should eventually pull cow numbers lower.

Milk production in Europe continued on pace with 4.2% growth in January. Most of the major countries saw another month of solid growth – Germany +5.2%, France +3.9%, Italy +6.3%, and Poland +4.3%. However, other countries saw weaker gains – Netherlands +0.2%, Ireland +1.5%, and UK +1.5%. Given the relatively severe winter weather in February, the pace of milk production growth is expected to slow. In fact, preliminary data for February from several countries show lower output than prior year. Reported milk prices remained in the mid-30’s in February, although the spot milk values are in the upper 20’s. If prices would fall below 30, it would approach break-even for a number of farms and likely lead to a cut-back in milk output in the second half of the year.  

New Zealand's milk production season is winding down with projections for the season of down 2-3%. This is below early season estimates due to poor spring and summer weather. However, farmers are enjoying a good year financially. Fonterra recently increased its forecasted farm gate milk price for the 2017/18 season to $6.55 per kilogram of milk solids. This is $0.15 higher than their December forecast. They attributed the payout increase to the ongoing strong international dairy demand and stable global supply, which has supported prices in recent months, particularly for whole milk powder.

Summary: The global dairy market remains long on skim and short on fat. Prices for most products have been relatively stable over the last few months as buyers have had little reason to get more aggressive. Supply fundamentals remain bearish until mid-year with peak milk production in the northern hemisphere. Markets are expected to tighten in the second half of the year.

The outlook for dairy products remains mixed with stable cheese, whey, and WMP prices, lower SMP, but higher butter/fat. The GDT price index has eased slightly lower over the last 2 months with WMP trading in a narrow range ($3,225-3,275/MT). Butter remains the dairy product with the most potential upside given the low stocks situation in Europe – the catalyst for last year’s record high prices. 

Summary: There is not much new in the cheese market. European and NZ cheese prices remain at a premium to US prices, which have been range bound for several months. Increasing supplies are forecasted to put downward pressure on prices in Q2.      

US cheese prices experienced some unexpected strength in March, but appear to be weakening as April started. Global prices are hovering around the $1.70 level with the US trading at a discount. The story remains mostly unchanged from prior months – stocks are ample and milk is growing in key cheese producing states, yet demand has been able to keep pace. As a result, US cheese prices continue to trade in the $1.40-1.50’s. My outlook is unchanged with some seasonal weakness expected into the spring as production peaks. I believe cheese stocks will remain above year ago levels, but demand, both domestic and exports, should be able to provide some support later this year. 

Summary: Butter prices in Europe have rallied over 20% since the start of the year while US and NZ prices have traded at a discount. With European butter stocks at historically low levels to start the year, the market will remain nervous until stocks rebuild.

Like cheese, US butter prices have traded in a narrow range with some upward drift over the last month before shooting higher on April 4. CME spot trading has been very active over the few last weeks and futures have held a solid premium, which has supported cash prices through the carry trade. Stocks remain abundant with February stocks growing over 50 million pounds – the fastest rate for the month since 1994. Cream has been plentiful and cheap so far this year, so butter churns have taken advantage and made more butter. European prices eased slightly in March, but have moved back near €5000/MT with futures pointing to further gains. End of January stocks were near 70,000 MT – historically low for the date. As a result, fat buyers in Europe remain on edge given last year’s astonishing run to record high prices.

Bearish US fundamentals are being offset by a more bullish global outlook. On their own, I don’t believe US butter prices have much upside from current levels (low-mid $2.30’s). However, from a psychological standpoint, higher global prices will provide support to US prices. 

Summary: The world is still long skim milk powder and the market tone is weak. The EU Commission is slowly selling their SMP stocks, but there is much more to go.

February milk powder production in the US was up 7.5% vs. year ago as strong milk growth and new plants resulted in more powder. NFDM production was 12% higher while SMP dropped 9% from last year. Not surprisingly, February stocks grew to a new record high. However, there was a big downward revision to January stocks (33MM pounds less), so the stocks situation, while still burdensome, isn’t as severe as it looked last month. The spring flush should keep powder plants full and another plant is expected to come online later this year, adding to an already oversupplied market. As noted in prior reports, NFDM/SMP has the most bearish set of fundamentals in the dairy complex and will likely lag behind in any price recovery this year. The Chinese trade retaliation is grabbing headlines, but the NAFTA renegotiation lurks in the background and could have a major impact on US NFDM/SMP prices.

Summary: There are signs of green shoots in a few whey products. Stocks remain above year ago, but prices have firmed in recent weeks for dry whey and lactose.     

Dry whey prices have been stable with more of the same expected this spring. As the year started, global whey prices had converged near $0.30/lb. Since then, NZ prices have held steady while European prices moved up and US prices sank. I expect European prices to ease lower in Q2 with US prices remaining in the mid-$0.20’s. February dry whey production was nearly 15% above last year, but stocks fell 2% during the month implying good demand. Reportedly, Asian demand has picked up in recent weeks, resulting in a firmer market tone. However, with peak milk and cheese production in Q2, it will be difficult for whey prices to move higher until the second half. While dairy has been untouched in the Chinese tariff retaliation, whey would be the most impacted for US dairy products if it were targeted.

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