Increased global milk production provided the framework, and two events – the Russian ban on dairy imports and China’s steeper-than-anticipated drop in import demand – painted the landscape that will define the global dairy picture into next year, according to a new report from USDA’s Foreign Agricultural Service.
Global and U.S. milk production increases unfolded in a largely predictable path, with high prices early in 2014 coupling with declining feed prices, creating profit margins encouraging dairy expansion, according to Dairy: World Markets and Trade, released Dec. 16.
Not surprisingly, 2014 milk output among major exporters is expected to grow by 4% over last year. Through October, Australia, milk production was up 4.5% compared to the same period last year; the full-year forecast is revised up 3%. New Zealand milk production got off to an extremely strong seasonal start and, although it has moderated somewhat, is expected to be up 8% in 2014 compared to a year earlier. In the European Union (EU), a mild wet winter coupled with an early spring resulted in excellent pasture conditions. Low feed prices and high milk prices further contributed to a sharp expansion in milk output, which grew nearly 6% ahead of last year’s pace through September. The 2014 forecast is revised up by 5%.
This surge in milk production and accompanying products inevitably led to a decline in dairy prices.
China’s decline in whole milk powder (WMP) demand during the latter half of 2014 resulted in a precipitous price drop. After lingering at around $5,000/ton, it fell by over 50% since January 2014 and, according to FAS, and is trading as low as $2,300/ton.
The Russian ban, announced in August, was particularly hard on the European Union (EU), and produced a domino effect as the EU's dairy products sought other markets.
For 2015, dairy prices will be remain pressure from both a supply and demand perspective. The Russian ban is scheduled to be lifted in early August, but recent signs, due to low oil prices, point to an economic crisis. The Chinese will remain major purchasers of WMP, albeit at a much more modest pace. China's economy is expected to slow somewhat, and the anticipated demographic boom expected from the relaxation of the one-child policy has thus far not materialized.
On the production side, the EU dairy cow herd is expected to expand as production quotas are scheduled to be eliminated by end of March. However, milk production will likely be tempered by low world market prices, translating into lower farmer milk prices and tighter margins.
The outlook for New Zealand points to a slowdown in the production growth, as lower farm-level prices put extreme pressure on producer margins, limiting growth to about 2%. New Zealand dairy farmers are also face additional environmental constraints.
So, while milk production among major exporters is expected to slow and expand by only 1%, the speed at which dairy prices recover will depend on drawing down accumulated stocks in both exporting and importing countries. Barring any adverse weather, the outlook for 2015 points to a continuation of lower prices until the oversupply imbalance is corrected. It appears likely that if current low dairy prices persist, producer margins will start to be severely squeezed – translating into production cutbacks.
The outlook for U.S. dairy farmers is mixed, as shipments of dairy products are forecast at $6.7 billion for fiscal year (FY) 2015 – a 9% drop from the record $7.4 billion in dairy exports registered in FY 2014. However, U.S. exports will face a more competitive environment as Oceania and the EU vie to maintain market share in the Asian markets.
There’s one bit of good news comes closer to home. The U.S. economy continues to accelerate, with gross domestic product (GDP) forecast to grow from 2.3% this year to 3.3% in 2015. Consequently, domestic demand is likely to remain fairly robust. Low feed prices will allow farmers to sustain margins, albeit at a lower level.
To read the full report USDA Farm Service Agency report, click here