International dairy product prices remain above U.S. domestic prices and world demand for dairy products remains healthy. Oceania has begun its 2013-2014 production season which will peak in October. However, reports still indicate finished product stocks are only adequate for servicing existing accounts with little extra for other demand. A similar situation exists in the EU with EU milk output expected to grow at less than +1.0 percent. Two cases of tainted dairy products exported from New Zealand to China have taken some of the luster off Oceania’s reputation for top quality products. Thus, U.S. dairy exports should remain strong as long as our domestic prices remain below international prices, which looks virtually certain at this point. U.S. dairy exports are on an absolute tear with May and June both topping 16 percent of U.S. milk production on a total solids basis and year-to-date at 14.7 percent. However, domestic consumption remains poor being with total commercial disappearance down 0.7 percent January-May despite record exports. The U.S. dollar is off its recent highs which should bolster the already very strong export market.
Earlier this spring I was very confident dairy product prices would be strong this summer. However, stronger producer margins, higher milk production, sluggish domestic dairy consumption and record cheese and butter inventories has put a real damper on my enthusiasm. In the short term I expect prices to continue to slowly erode until the fall holiday sales season gets into full swing in October and early November. Even then prices may not recover recent losses if the fall holiday sales seasons parallels current domestic consumption trends. Undoubtedly domestic consumption remains the industry’s biggest headache. Also, consumer confidence slipped in July (down1.8 points from June) further dimming hope of stronger domestic dairy sales.
U.S. dairy exports promise to remain very strong at least through the end of this year, which is really the only bright spot for the industry and the only reason milk prices have not totally crashed. Look for U.S. milk production to grow at or above trend as we move into 2014 as lower feed prices will fuel greater output. The only hope I see – and it is only a small glimmer – is for a robust fall and holiday dairy product sales season. If that does not materialize we will look back at 2013 as a year with decent prices in the first half and poor prices in the second half.
Producers should sharpen their pencils, calculate their latest cost of production and look for pricing opportunities for both milk and feed. Class III prices may erode further as we move into fall. If so, don’t be surprised to see the CME Class III average for Q-4 2013 in the $16.80 range. Remember: marketing is first about price risk management and secondarily about profit enhancement. Michigan State University Extension recommends working on increasing your overall average milk price rather than trying to hit the market high.