Milk Prices Should Begin Recovery by Mid Year

Economists and analysts at Informa Economics expect dairy prices both here in the United States and globally to begin a slow recovery this summer.

By the end of 2016, U.S. milk prices could rebound to something like $16 or $17 Class III, and perhaps $17 or $18 on an all-milk basis.

The key will be European milk production, which had increased five percent over the past 10 months as milk production quotas were lifted April 1. “European Union margins will turn sharply negative by April and May, almost as bad as in 2012 and could be as bad as 2009,” says Nate Donnay, director of dairy services with Informa.

Europe is key to dairy prices because it supplies 36% of the world dairy exports, a tick more than New Zealand. Its five percent growth over the past year would be the equivalent of New Zealand increasing milk production by 34% in a year, or the U.S. adding 8%, says Donnay.

Europe’s expansion has been 200,000 to 400,000 metric tons more per month than economic models were predicting prior to the end of quota. “We think this was the impact of long-term investments made by farmers [in facilities and cattle] to take advantage of the removal of quotas,” he says.

But low prices and negative milk-feed margins will eventually halt the growth. European processors, many of which are cooperatives owned by farmers, have been subsidizing milk prices this winter. “But there has to be a limit to how far they can go,” says Richard Dillon, editor of Informa’s Dairy Markets.

Next week, France will submit a proposal to the European Union to pay farmers to cut milk production, says Dillon. But he sees little chance of that happening, given the EU’s financial constraints.

The analysts also don’t see New Zealand increasing milk production any time soon. “The margins in New Zealand have been very rough,” says Donnay. “New Zealand will only get back to breakeven for 2016/2017, so we won’t see a lot of growth next production season from them.”

Global demand for dairy products could also be positive, given predictions of strong gross domestic product growth predicted for this year. “Dairy exports in 2015 were actually up 7 ½% if you strip out China and Russia,” says Donnay.

China is already increasing its purchases, though not to the level of 2014.  Russia will be key to global demand, and the biggest bullish driver of dairy price prospects, says Donnay.

“If Russia ends its embargo, it would be a huge shift in global demand,” he says. “If the embargo is dropped in August, and Russia imports at just half the level that it was importing, we would get quite a jump in prices. But predicting when Russia will come back into the market is nearly impossible.”