Outlook 2019: Dairy producer margins projected to improve as product demand soars

Looking at the market dynamics of 2018. it has been an interest­ing ride, Joe Cook, senior dairy analyst for lnforma Economics IEG, told Feedstuffs.

"Everything started going a little hay­wire during the fourth quarter of 2017 and the first quarter of 2018," he said. "New Zealand had a drought, which resulted in a decline in milk production. Because o( the decline in production in New Zealand, exports from the region were down, but global demand for butterfat and milkfat products is the highest it's ever been."

Europe stepped up to the plate and started exporting a lot more, picking up global market share from New Zealand, Cook said. "This escalated milkfat pric­es even further than they have been, which have been historically high for the last three years," he added.

The U.S. also started exporting more, according to Cook. "For instance, the U.S. is up approximately 40% year to date compared to last year (or butter exports - just huge," he explained.

Conditions have returned to being more optimal for New Zealand, and production is expected to increase next year, he said.

"What we're looking at now is that New Zealand has recovered, Europe is pulling back on its market share and, with global demand the way it is, we're looking at milk production to be increasing in all major exporting coun­tries over next year. So, we're bullish going into next year, just given the huge demand that we've seen," Cook said.

Specific to the U.S. 2018 has been a year characterized by low margins and tough decisions.

"The margins we saw this year hadn't been that low since July 2016, and that was only for [ about ] two months. Be­fore that, they were much higher," Cook said, adding thal the low margins lasted all of this year (Figure). "So, it has been a long stretch, and that drove a lot of farmers out."

However, those smaller herds are moving into bigger farms, he explained, adding, "Despite having the lower mar­gins, U.S. production has been growing this year, and much of that growth is in the larger farms."

Still, growth in U.S. production has retracted somewhat in an effort to improve margins, he noted.

As for next year, Cook said margins will start to recover going Into the first quarter of 2019 and then will really start lo be more profitable during the second quarter.

"Our herd size Is bigger than It was last year, and were expecting even more growth next year once the mar­gins are even better," he said.

IEG Is forecasting milk production next year to Increase about 1.1% over this year.

Nationally, milk margins saw huge declines from January to February, but Cook said they have been Improving since I hen. The feed cost margin (average milk price minus feed price) for the US Is currently sitting at $I0.24/cwt. IEG projects that this will rise to ap­proximately $11.20/cwt. in 2019.

"Typically, we expect the dalry herd to expand at around $11.00, so we're going to start to see the herd Increase again." Cook said.

IEG expects the all-milk price to be $16.05/cwt. In 2019 and 17.01/cwt. in 2019.

Cheese, butter on fire

Domestic and global cheese demand has been the highest ever, even with declines due to retaliatory trade tariffs, according to Cook.

"What we saw In June to August was a huge decline in cheese exports to Mex­ico - down 10% from the same period last year, he said. "That has affected the Midwest spot cheese market. That's why we've seen some of the cheese pricing falling."

Total cheese exports have Increased, up 5% so far this year.

Domestic cheese consumption this year has also averaged about 5% more than last year, Cook noted, "so we're ex­pecting that trend for cheese and but­ter demand - milk fat, In general - to Increase domestically."

Year-to-dale butter exports are 43% higher.

"One of the biggest new (export cus­tomers] that has stepped in randomly is Honduras, with an 8,000% increase for US butter. They were Importing 14 metric tons in 2017, and now they're the third ­largest importer for butter," Cook said.

Canada Is currently the top Importer of U.S. butter, and even with the trade issues, exports have still Increased 6% so far this year, Cook said.

With the higher cheese and butter demand, there Is Inevitably more skim milk powder (SMP) and whey protein. Cook explained.

"In Europe, there are huge stockpiles SMP that the government has been trying to get rid of, but the government has been instituting programs to tackle that." he said. "'They have been under­cutting the market prices, and those stockpiles have been decreasing."

As a result, Cook said milk powder prices have been increasing. In addition, under the new U.S.-Mexico-Canada trade agreement, Canada will also no longer be allowed to dump SMP on the global milk market.

U.S. whey protein exports are up 26% year to date, Cook said.

Even with number-one customer China applying retaliatory Import tariffs. year­

to-date whey protein exports are still up 13%, although they are down from 20% in February. However, Cook said that hasn't been reflected In the price.

"Whey demand Is still strong globally. but the tariffs, will be affecting price more during the first and second quar­ters next year, when countries do a lot of their buying." he explained.

For fluid milk, sales continue to be lackluster, down 2.1% through July compared to the same time frame last year. However, whole milk sales have risen 1.82% as consumer demand for whole-fat products Is on the rise.

Going Into 2019, the bottom line for the dairy sector overall is that global demand in general is going to be price supportive. Cook said.

"With the Increased demand In milk fat, the seasonal demand from this coming holiday for other milk products and herd retraction, we are anticipating higher milk prlce for 2019," he said. "Well start to see margins improve by the second quarter next year"