Are we headed for record milk prices?

After peaking at 9.4 million head of dairy cows in January 2018, dairy cow numbers have slid by 120,000 head over the past 20 months. This in turn has caused the annual growth rate of U.S. milk production to fall below 1 percent for both 2018 and 2019. That’s after posting an average annual growth rate of 1.7 percent during the 2014 to 2017 time period.

The recent decline in dairy cow numbers is only about one half of the decline the dairy industry experienced over a 12-month time span beginning in late 2008. The slowdown in milk production is one of the primary factors that has allowed farm-level milk prices to improve over the past seven consecutive months to reach $18.90 per hundredweight.

A moving milk price

The short-term outlook for milk prices depends on how milk supplies change in response to a better economic situation than the dairy industry has seen for several months this year. If dairy cows and milk supplies begin to grow again in the near-term, it will likely stifle any further improvement in milk and dairy product prices. If cow numbers continue to inch lower, even higher milk prices could occur.

The data shows that two-thirds of the decline in dairy cows that occurred from January 2018 to August 2019 occurred in the first half of this period, with only minor additional reductions in recent months. It would appear there will be an increasing stubbornness for further declines in dairy cows from today’s levels. However, the appetite for expansion may also remain low given the tough economic times dairy producers have faced in recent years.

Feed supplies and prices could also affect the incentive for dairy producers to expand or reduce milk supplies. Although 2019 has been a challenging year to grow crops, it appears that crops harvested in 2019 may not suffer as much as some had previously projected. That could keep feed prices at more reasonable levels than many expected just a few months ago.

This fluid crop situation will result in milk yields at higher levels as producers utilize cheaper than expected feed supplies. Acreage devoted to crops that are important feed inputs to the dairy industry is not expected to decline for 2020, barring weather issues next spring.

A look to the horizon

It should not be overlooked that aggregate U.S. milk supplies tend to expand rapidly in periods of strong economic returns but are difficult to slow in periods of weak economic returns. The past 20 months provides another indication of the difficulties the industry faces in reducing milk supplies. It supports the idea that aggregate milk supplies are less responsive to tough economic periods and more responsive to positive economic periods. Individual producers should think about their own expansion plans relative to the aggregate industry response seen the past several years.

Demand matters, too

Although milk supplies may be more important to the short-term outlook for milk prices, demand can’t be overlooked. For the first seven months of 2019, commercial use of American cheese expanded by 50 million pounds and other cheeses posted a 106 million-pound gain relative to the same period in 2018. Even nonfat dry milk domestic commercial disappearance has expanded by 79 million pounds over the first seven months of 2019 relative to last year.

Global markets have been important to the added demand for U.S. dairy products in 2019. Global demand has been growing in key markets and milk supply growth in other key exporting countries has been slowing as drought and other issues remain at play.

Weather and dairy farmer financial issues appear poised to keep growth in Oceania milk supplies at bay for the foreseeable future. Of course, Oceania is the world’s largest dairy product exporting region. Barring a global economic downturn or new trade policy issues, demand for U.S. dairy products in key Asian markets shows room for further expansion in the coming months.

Inventories are down

Stronger domestic demand for most dairy products has tightened many U.S. dairy product balance sheets. Cheese prices started the year at $1.40 per pound and have steadily marched to $2 per pound in 2019, providing the major lift to farmer milk prices.

Although there appears to be little demand slowdown at these higher prices, pushing well beyond these current levels may prove more difficult. September 2019 was the first time that cheese prices have averaged more than $2 per pound for the month since October 2014.

Should the economy falter

The strength of the domestic economy appears to be the most important factor to maintaining the demand picture that has unfolded in 2019. If the economy were to falter, it would spell trouble for domestic demand for U.S. dairy products.

Given the inelastic nature of both supply of and demand for dairy products, it is important to remember that if the current situation of slowing milk supplies and stronger demand for U.S. dairy products continues, the possibility of significant increases in milk prices from today’s levels is growing. However, it is beginning to look as if the slowdown in milk supplies is coming to an end, which may keep a lid on how much higher milk prices will go as we enter into 2020.

From: Hoard's Dairyman

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