Farming requires a certain amount of optimism. No matter how bad it gets, things will turn around in six months. As the picture gets painted for the 2019 dairy forecast, that appears to be the case as the second half of the year will likely be when producers start to see price recovery.
Actually, looking back six months, prices were destined for recovery before tariffs on dairy products put in place by three of our top four largest customers—Mexico, Canada and China—derailed progress. As production continued to sail along, that drop in sales to those three countries plus the negative demand ripples in the market from that decision caused prices to lag throughout the remainder of the year.
But it looks like prices are starting to rebuild. “Futures prices indicate that price relief is indeed about six months away,” says Mike North, president of Commodity Risk Management Group.
The factors determining if and when that price recovery happens is simple supply-demand economics.
Supply continues to be an issue with production still improving at just over 1% growth on a year-over-year basis. That continual growth still acts as a governor on any sort of price improvement.
“We thought supply would back down given the tough financial times,” says Scott Brown, an economist at the University of Missouri. “Yet the data we have today in front of us suggests that’s very slow to do. In fact we have some states that are actually growing in terms of capital inventories.”
Supply will continue to hold down price improvement until something dramatic happens in the marketplace. That could come in the form of a smaller cow herd, North says. The latest USDA reports show that dairy producers have sent about 100,000 more cows to slaughter in 2018 than last year. According to North, historically when that many head have been culled we see the impact on prices in about 6 to 12 months.
“Demand aside, a lot of the movement toward really high prices that we have seen historically have come at the back end of extreme culling during very hard financial times,” North says. “We may already be there. Let’s face it, it’s been rough. With some of the adjustments by USDA to cow numbers, we may be already testing some of that philosophy.”
The rather static state of the milk supply means more pressure will be put on the demand side of the equation, and any forecasting of changes to global demand for U.S. products centers on tariffs. The tariffs haven’t helped demand, in fact our tariffs on China are having a negative impact on that country’s ability to purchase product on the global market, which puts a significant wet blanket on global demand.
“If we could remove the steel tariffs from Mexico so they would start buying our cheese without tariffs, that would be great,” North says. “And then if China came back to the table with any kind of zeal that would be a really big opportunity.”
The relative strength of the U.S. economy should support continued growth in domestic demand, as lower unemployment and higher wages puts more money in consumer products to spend more time in restaurants and buy higher value dairy products.
“Frankly that domestic demand side has really pulled us,” Brown says. “Having the lowest unemployment rate in decades has just been the fuel that we needed to help us in a large supply situation.”
In the short term, economists are predicting a situation with 2019 milk prices similar to where prices were at in 2018, with improvement happening later in the year. “We’re forecasting maybe $1 higher than 2018,” says Brian Rice, founder and co-owner of Rice Dairy, a dairy brokerage firm. “We don’t see anything dramatically changing the supply-demand balance sheet. Things could change, but we don’t have the data that shows us that yet.”
Looking farther into the future, even with the stubborn supply situation and demand uncertainties, it’s likely producers will see $20 per cwt milk prices within the next five years. “I’d bet the over on an 85% certainty that prices will hit $20 within the next five years,” Rice says. “When is the big question, but there is a high probability that we’ll hit that in the next five years.”
To learn more about the dairy economy going into 2019, watch the U.S. Farm Report segment where Rice, Brown and North share their perspectives: