The average all-milk price received by U.S. farmers for 2014 according to USDA was a record high of $23.97 per hundredweight (CWT), almost 20 percent higher than a year earlier. Exports were a major force in that as they were 19.0 percent of milk production on a skim-solids milk-equivalent basis (6.0 percent on a milk-fat milk-equivalent basis). Some dairy product exports have been declining in recent months and market prices have been following them lower. It will take time to restore a supply/demand balance in the milk market.
The projected all-milk price by USDA for 2015 in the latest Livestock, Dairy, and Poultry Outlook is $17.75-$18.55 per CWT. End of year inventories for all dairy products are expected to have been higher and wholesale dairy product prices were moving lower as the old year gave way to new, except for dry whey prices which were about steady. With lower feed prices, cow numbers and milk per cow are still projected to increase in 2015 over 2014 levels. Exports markets are expected to become somewhat more attractive due to lower projected wholesale domestic dairy product prices.
The U.S. is not the only country responding to favorable market prices with increased output according to the Foreign Agricultural Service (FAS) of USDA in its December 2014 Dairy: World Markets and Trade. Among major dairy product exporters, the EU was the largest producer of milk in 2014 at an estimated 146.7 million metric tons (MMT). Production was up 5 percent in 2014 and will only increase to 147.0 MMT in 2015 due to low market prices, even though country quotas will be removed. The U.S. is the second largest producer among major exporters at 93.5 MMT in 2014.
New Zealand was the third largest producer/exporter at 21.7 MMT in 2014 and is expected to increase production to 22.1 MMT in 2015. Like the EU, New Zealand had an 8 percent output increase in 2014 as it recovered from a drought and the negative price outlook will temper further production increases. Argentina is the fourth largest milk producer/exporter at 11.4 MMT and is expected to increase production by 0.3 MMT, but government policy will attempt to keep much of that for the domestic market. Australia is the fifth largest at 9.7 MMT in 2014, up 3 percent, and is expected to only have a slight increase in 2015.
On the import side some issues have to be resolved with Russia and China. An import ban on EU dairy products was implemented by Russia in early August 2014.
The EU exported 257,000 metric tons (MT) of cheese to Russia in 2013 and shipped 133,000 MT through August 2014. EU cheese exports are expected to rebound in the second half of 2015. They could increase sharply because milk production in Russia has been declining since 2010 and inventories of products could be minimal by August. Russia is importing some quantity of raw milk from Belarus. Russia could continue the ban on the EU cheese, but that is not the expected outcome because dairy product imports fill an important market demand.
The Chinese situation is more complicated. It bought an unusually large 535,000 MT of whole milk powder (WMP) in the first half of 2014. That apparently led to an accumulation of stocks while domestic consumption growth slowed because of slower economic growth. China reduced second-half imports to a projected 145,000 MT. Imports of WMP for 2015 are forecast at 600,000 MT on the assumption that substantial carryover supplies will be reduced in the first half of 2015.
This uneven rate of purchases by China for WMP is not unique. It has happened in soybeans, cotton and other commodities. Their data flows on import purchases do not appear to be robust enough to keep all buyers informed about what others are doing. When purchase volumes are too good to be true, they usually are, and indicate that some future adjustment will be needed.
China has been a more consistent buyer for other products. Skimmed milk powder (SMP) imports increased by 4,000 MT to 334,000 MT in 2014; imports are expected to grow by 8 percent to 360,000 MT in 2015. China will also implement new customs clearance procedures that could allow the shipment of fresh milk from Australia to Chinese supermarkets in 8 days. Australian exports fluid milk mostly in the form of UHT milk and is expected to expand volume by 20 percent totaling 113,000 MT in 2015.
The FAS report has some good news from a minor exporter – India. It has been increasing skimmed milk powder (SMP) production and exporting to Bangladesh, Pakistan and North Africa. Because of strong domestic demand, 2014 exports were reduced by one third to 80,000 MT. This situation is likely to repeat in 2015.
U.S. dairy farmers are expected to suffer some of the pain of adjustment. Dairy product exports are forecast at $6.7 billion for FY 2015 (October 2014–September 2015) a 9 percent drop from the record $7.4 billion in FY 2014. U.S. exports will face more competition from Oceania and the EU in Asian markets. Exports of cheese are expected to decline by 5 percent in 2015 to 347,000 MT and shipments of SMP will likely also decline by 5 percent to 516,000 MT. This will be partially offset by a strong domestic market and lower feed prices.
The FAS analysis makes a good summary statement in its introductory comments, “Barring any adverse weather, the outlook for 2015 points to a continuation of lower prices until the oversupply imbalance is corrected.” Export markets are good long-term markets for dairy exporters, but they are also the only place to move excess supplies that accumulate when production is out of line with long-term demand at profitable prices. That can only happen at lower prices. Those lower prices limit production increases or cause production slowdowns and stimulate consumption. Work is needed on both sides to correct the oversupply imbalance.
The U.S. dairy industry suffered a similar export adjustment in the worldwide economic slowdown in 2009. Exports from the U.S. were record large in 2008 and fell by 50 percent in 2009; the yearly average U.S. farm price of milk fell by 30 percent from 2008 to 2009. Exports almost completely recovered in 2010 before increasing some in 2011 and giving-up that increase in 2012; a new yearly average price high was set in 2012. Exports made another surge upward in 2013. The U.S. industry will need to learn to live with volume and price volatility in the dairy product export market.
Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org).