That optimism is based on the convergence of world and U.S. prices for dairy commodities, an increase in exports and slowing of global milk production.
The U.S. has been competitive with skim milk powder and whey all along, but domestic prices for cheese and butter have been quite a bit higher than world prices, said Mark Stephenson, director of dairy policy analysis at the University of Wisconsin.
“Now the rest of the world prices have come up and ours have come down,” he said in the latest Dairy Situation and Outlook podcast presented with Bob Cropp, professor emeritus with the university.
Part of the reason for the rebound in world prices is that the U.S. is the only major milk producing and exporting country that is increasing milk production, and at a relatively modest level, he said.
Production in the EU, which was posting 5 percent year-over-year growth earlier this year, has slowed with a voluntary supply management initiative and is expected to drop 2.9 percent in the fourth quarter and remain below year-earlier levels in the first half of next year, Cropp said.
Production is also down in Argentina, Australia and New Zealand due to weather and low milk prices, he said.
“I think that maybe this makes the world a little nervous, and we’re seeing some more buying activity going on. China’s been in the market pretty big and Mexico’s been back in and bought some powder,” Stephenson said.
He suspects buyers were convinced the market was at it bottom and jumping in to buy at the lowest prices possible, he said.
“Now perhaps it’s not just the bottom of the market, but you see milk supplies actually reducing worldwide, stocks being pulled down, and you want to make sure you’re not short of product if you’re a buyer,” he said.
That’s lending some push on prices. The markets are on the upside of the cycle, and prices can respond strongly, he said.
“It’s possible that … prices could strengthen more than what many people are expecting,” he said.
Crop said he’s more optimistic than USDA, the futures market and most forecasters, expecting Class III milk prices to move into the $16s per hundredweight by the second quarter of 2017 and strengthening to the high $16s in the third and fourth quarters.
“I would not even rule out $17. But that’s much higher than USDA is saying,” he said.
USDA’s latest forecast on Class III milk is $14.20 to $15.10 for all of 2017.
But Cropp thinks USDA is overstating its forecast growth in U.S. milk production and understating potential exports, he said.
Stephenson said he’s even more optimistic than Cropp.
“I think we can pretty confidently say it’s going to be a better Christmas than we had last year,” he said.
“And a better year next year, but another month will tell us quite a bit,” Cropp said.
Source: CapitalPress
Link: http://www.capitalpress.com/Dairy/20161027/wisconsin-dairy-economists-optimistic-about-milk-prices
