Good news hard to find in dairy markets, but there may be a silver lining

posted Dec. 26, 2017 7:13 a.m. (CDT)
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by / Lee Mielke

November milk output was up for the 47th consecutive month in the U.S., totaling 16.2 billion pounds in the top 23 states, according to preliminary Agriculture Department data, up 1.1 percent from November 2016. The 50-state total, at 17.3 billion pounds, was up 1 percent. Revisions lowered the Oct. 23-state estimate by 27 million pounds, now put at 16.7 billion pounds, up 1.3 percent from a year ago.

Milk cow numbers totaled 8.73 million head in the 23 states, unchanged from October but 57,000 more than a year ago. The 50-state total, at 9.4 million head, was unchanged from October but 53,000 above a year ago. Output per cow averaged 1,861 pounds in the 23 states, up 9 pounds.

The report was viewed as feeding the bulls, but the Daily Dairy Report’s Sarina Sharp points out a future factor in milk output in the Dec. 15 Milk Producers Council newsletter. Sharp reported that a number of U.S. dairy producers will no longer be allowed to use rBST in 2018, “slowing increases in production per cow” and “in time, this will help to reduce dairy product inventories and boost prices.”

Cash dairy prices weakened the week before Christmas. A somewhat bullish Milk Production report may have added some strength to the cheese and powder, but traders were also anticipating the November Cold Storage report. The first Class I base milk price of 2018 was announced by the USDA at $15.44 per hundredweight, down $1.44 from December, $2.01 below last January and equating to about $1.33 per gallon, down from $1.45 in December. It is the lowest Class I price since June.

Penn State’s December Dairy Outlook states that “the milk price forecast for 2018 is starting to solidify, and good news is hard to find. U.S. milk production growth has slowed, but global supply is still hampering future price increases.” It adds that “bearish factors keeping futures prices in check continue to include the heavy inventories of dried milk products in inventory in the European Union, as well as the expected milk production increase this year in the EU.”

Back on the home front, the Outlook reports that “USDA has calculated the Net Farm Income (profit earned on all farms across the U.S. from the sale of all commodities produced) will be up 3 percent from the previous year and will total $63.2 billion for fiscal year 2017. This is good news that Net Farm Income has increased slightly year-over-year, but a sobering realization about NFI is that in 2013, NFI was $129 billion.”

USDA’s latest Livestock, Dairy and Poultry Outlook, as always, mirrored much of the Dec. 12 World Agricultural Supply and Demand Estimates report and echoed the negative sentiment of the dairy markets.

Addressing the all-important feed equation, the Outlook stated: The 2017-18 price forecast for corn is $2.85-$3.55 per pound, unchanged from last month’s forecast at the midpoint of the range. The soybean meal price forecast is $295-$335 per short ton, unchanged from last month. The alfalfa hay price in October was $152 per short ton, $3 more than September and $17 more than 2016.

“The fourth-quarter 2017 forecast for the size of the dairy herd was unchanged at 9.405 million head, but the fourth-quarter milk per cow forecast was lowered to 5,675 pounds based on recent data. These changes result in a milk forecast of 215.7 billion pounds, 100 million pounds lower than the previous forecast.

“The forecast for the size of the dairy herd in 2018 was lowered to 9.435 million head, as lower milk prices are expected to lead to slower growth in the second half of the year. Based on recent data and lower expected prices, the milk per cow forecast was reduced to 23,250 pounds. With these changes, milk production is now projected at 219.3 billion pounds for the year, 400 million pounds lower than previously forecast.”

The latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC reports that dairy margins deteriorated over the first half of December: “Lower milk prices more than offset the impact from cheaper feed costs. Margins are now negative through the first half of 2018 and only projected slightly above breakeven through the second half 2018

“Milk prices continue to be pressured by the large global overhang of dairy product stocks, particularly nonfat dry milk and skim milk powder.”

The MW concludes: “The EU and Japan reached an historic trade agreement that will go into effect in March 2019 and lower tariffs on farm products including cheese should provide the EU with a significant advantage to U.S. supplies.”

FCStone’s Dave Kurzawski points to a “silver lining in the dark cloud” in his Dec. 22 Early Morning Update. He says the newly passed tax bill “opens the door for more business expansion and the repatriation of funds (possibly up to $2.5 trillion) in early 2018. U.S. annual economic growth is approaching 3.5 percent in 2017 with no signs of that rate slowing in 2018 (first time above 3 percent since 2006).

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