Prolonged Milk Price Pressure in 2018

Analysts expect milk prices to remain depressed through at least the first half of 2018. ( Wyatt Bechtel )

As we head into 2018, all eyes are on the milk price as farmers yearn for relief after three consecutive years of tough margins. We asked Mark Stephenson, an economist at the University of Wisconsin-Madison; Andrew Novakovic, an economist at Cornell University; and Sara Dorland, a market analyst with the Daily Dairy Report to give us their thoughts on 2018.

Q: What's the No. 1 factor you think will impact milk prices in 2018?

Mark Stephenson: Milk production. It is too strong, and there’s too much dairy product in inventory, especially milk proteins. As long as we continue to maintain or grow milk supplies faster than demand for dairy products, milk prices will remain relatively low.

Andrew Novakovic: Global balance of milk supply and demand. I think the punchline here is that global forces dominate the prices U.S. dairy farmers and processors experience, recognizing that there is a little wiggle room for “local” effects.

Sara Dorland: Definitely European milk supply. While demand throughout the globe remains very positive, supply can, for a time, overwhelm demand. We experienced that in 2015 into 2016. That suggests more milk from Europe could weigh on milk and dairy product prices at the start of the year, but supply contraction and regaining balance could lift prices.


Q: Which regions of the world are you watching the closes going into 2018?

Mark Stephenson: I’m keeping my eyes on Oceania and several countries of the EU. Weather related pasture conditions in New Zealand are one metric, but the urge to grow in Ireland and Poland are also pushing world supplies.

Andrew Novakovic: Clearly the question on the table is Mexico. However, it is not so much a question of whether Mexico will be buying dairy products but rather who will they be buying them from.

Sara Dorland: I am keeping a watchful eye on Europe, its milk production, policy on supporting dairy producers and, should prices become untenable, how it handles intervention stocks.

Q: Do you think global demand will be enough to eat through the massive dairy stocks in the U.S.?

Mark Stephenson: The countries, like China, that are large enough to “move the needle” on world demand are producing more milk themselves. And, while I expect China to purchase additional powder and cheese, it will take time to work down world stocks. In order to move massive stocks of powder, you really need another emergent economy with a large middle class who wants to improve the quality of their diet. India could be such a country, but they historically don’t want to import what they might be able to produce at home.

Andrew Novakovic: No.

Sara Dorland: Both cheese and butter domestic demand are modestly higher than a year ago through September. Butter might not need exports to keep the market supported. Cheese likely will need the support of exports. But, with countries like China expanding cheese imports by 20% for the last few years, there are viable markets for U.S. cheese. In fact, the relaxing of cheese tariffs could help level the playing field a bit for U.S. cheese into China.

Q: In Sept/Oct we saw cow numbers decline for the first time in at least a year. Do you expect that to continue? If yes, what factors are influencing that other than milk price?

Mark Stephenson: I’m not sure. There are plenty of heifers in the pipeline and the cull cow price is not great. We might see more cows go to slaughter as we get into late winter and approaching spring when farms are going to lenders for operating loans. Open accounts are growing, and if cash gets tight, we could see more cows liquidated.

Andrew Novakovic: In my opinion, disinvestment in dairy farming is not strongly influenced by relatively short-term profitability outcomes. I think cull prices can influence evaluations about which cows are marginal, but that this is quite a different issue from exiting dairy farming. With generally good feed availability, I don’t foresee an unusual push on farm exits.

Sara Dorland: I think expansion in the milking herd is less likely and we will probably head into something that looks like a holding pattern at the start of 2018. While milk price is always a concern, a secure home for farm milk has become more of an issue in the past year. While there might still be some appetite for growth at the farm level, most of the new capacity is already committed.

Q: On paper, dairy margins don't look too terrible. That clearly doesn't match farmer sentiment. Why is that, and do you anticipate margins to improve?

Mark Stephenson: The cost side of margins is more than just feed cost. While those have remained relatively low, labor has been an issue—both in terms of availability and cost. And, after three years of relatively low prices, there is a fair amount of equipment that should probably be replaced and not repaired. Look for machinery repairs to be a more costly item in producer income statements.

Andrew Novakovic: Income over feed cost (IOFC) continues to fluctuate in an average range, probably the low side of average. However, there is some indication from farm records in New York, Michigan, and Wisconsin that non-feed costs have increased in recent years to the point net farm income levels are worse than what IOFC would indicate. There is also the issue of what I call the punch versus the scrape. Low-ish IOFC hasn’t hit very hard, but it has dragged on so long I think some farmers are getting worn out.

Sara Dorland: If we are looking at a milk-over-feed margin, things don’t look too bad at the farm level. However, that short-cut analysis requires a rather large assumption that all other costs are more or less unchanged over the comparison period. That is clearly not the case for many farms as labor, cost of borrowing, compliance, to name a few, are higher than past years and take a toll as milk price forecasts continue to deteriorate.

Q: What is your milk price forecast for 2018? Do you expect it to increase or decrease throughout the year?

Mark Stephenson: I have prices declining through the first quarter and probably the second quarter before they begin to recover. In some sense, I’m kicking the can down the road to a place where I am less certain. The first half will be low prices again (like 2016), but if world production begins to taper off and we move some of the stocks, maybe we can see some price recovery by the second half of the year.

Andrew Novakovic: I don’t make milk price forecasts. I think the consensus opinion is farm milk prices will be comparable to 2017 but a bit lower. I find that to be very plausible. I have a hard time getting more optimistic for farmers, but I also don’t feel there is a bigger downside risk. There is a related but subtly different issue concerning the profitability of co-ops and firms that will become less profitable if we do bomb NAFTA. That will impact premiums or even re-blends for selected groups of farms, more so than overall price levels.

Sara Dorland: While I expect lower average prices in 2018 compared to this year, for now I have the tale of two markets. I have depressed markets at the start of the year on the expectation of higher milk and dairy product supplies through the spring. I have prices lifting in the second half of the year expecting milk supply excesses to abate beginning mid-year.


Note: This article appears in the January 2018 magazine issue of Dairy Herd Management