Some weather event is going to be the best chance to see $20 milk in the coming year, said David W. Bullock, PhD, a senior economist for Agri Bank FCB, a regional funding bank within the Farm Credit System. “I hate to say it but I’m hoping for a little drought. But I think the chance of corn reaching $2 is much better than milk reaching $20.”
Bullock, whose job it is to analyze economic conditions in the 15-state Farm Credit region and offer advice to member banks, told his dairy audience that he sees a less than 25 percent chance of the federal dairy safety net program, the Margin Protection Program, arriving at margin-over-feed costs below the $8 maximum coverage level in the coming year. That would mean a payout from the program to farmers.
The economist analyzes market forces in many commodity areas – corn, soybeans and poultry as well as dairy — but says dairy is the most interesting and most complex of all the markets. He was in Madison recently to speak to dairy farmers and allied members of the Dairy Business Association, which hosted the Dairy Strong annual conference.
Prior to coming to Agri Bank, Bullock previously served as Senior Dairy Economist at Informa Economics, served in the Minnesota Department of Agriculture and at the Minneapolis Grain Exchange.
One of the conditions shaping current milk price is overall milk production, which is up 1.6 percent to 212 billion pounds (on a calendar-adjusted basis). The U.S. dairy herd stands at 9.33 million cows — up .15 percent. The average production per cow is 22,700 pounds — up 1.4 percent, he said.
While U.S. milk production is up slightly, production in other dairy regions of the world is down. European milk output is declining, he said. New Zealand’s milk production is down 3 percent compared to last year at this time and Australian milk production is off a whopping 10.3 percent as compared to last year at this time.
Bullock sees U.S. milk production growing in the coming calendar year by .5 to .6 percent – less than last year — because he thinks there will be slightly lower growth in cow numbers. That prediction will mean U.S. milk production will stand at 213 to 213.5 billion pounds of production.
He correlates that slight growth in cow numbers with recent milk prices and believes it creates a likely scenario for steady to slightly lower cow numbers.
Cow numbers in the United States dropped sharply after World War II, he noted, but over the past 10 years that number has been steady at around 9 to 9.3 billion head.
Production per cow stood at 4,032 pounds per cow per year in 1934 in the United States and was flat for 30 years after the end of WW II. But it has risen dramatically since 1975, with production per cow today at an average of nearly 23,000 pounds.
Because production per cow tends to be related to feed costs, Bullock told his dairy audience that the most likely scenario he sees is for a slightly lower growth rate in production per cow this year due to slightly high feed costs in 2017.
But weather will be the key determinant in that equation and we can’t continue to see bumper crops every year – it’s not in the cards.
Bullock said that U.S. growers have had four years of above trend-line average corn production and it would be unlikely to see that again this year, leading him to his assumption that corn production in 2017 “will return to trend-line averages.”
Long-term trends to consider, he said, include the fact that in the year 2000 only about one quarter of U.S. whey and one third of our non-fat dry milk was exported. In the most recent year for which there is data, he said that percentage rose to 50 percent or more for those dairy commodities.
For the last five years or so, Bullock said the production of about 400,000 U.S. cows goes to the export market.
Trade policies will be critical to maintaining dairy prices in the coming year, he said. Talk about re-negotiating the North American Free Trade Agreement (NAFTA) will affect dairy. Mexico buys over one-third of the U.S. production of non-fat dry milk and skim-milk powder.
“Becoming a protectionist country will have tremendous downside risk for dairy,” Bullock said.
The strong dollar will also keep negative pressure on NFDM prices in 2017, he added. The dollar-traded-weight index is likely to rise 3 to 4 percent by the end of the year – a measurement of the strength of the U.S. dollar. Agricultural exports lose about $330 million per month for every point in that dollar index, he added.
“Plus trade policy uncertainty will weigh heavily on that market,” he said. One-quarter of all cheese exports went to Mexico from 2011 to 2015. Other big markets for those cheese supplies were South Korea and Japan.
But he sees that a strong dollar will exert negative pressure on the non-fat dry milk price in 2017.
In terms of domestic consumption of dairy products, fluid milk consumption has been falling since WW II. Starting in 2009, the decline in per-capita fluid milk sales has accelerated. “There has been a dramatic drop in fluid demand. With Class I (fluid) milk dropping like that it creates a real challenge as a balancing product,” he said.
For one thing, Americans are eating less cereal for breakfast, he noted, and that contributes to less milk that gets poured on top of the cereal.
However, cheese consumption has been growing since the 1970s. Butter consumption bottomed out in the 1990s but has started to come back up.
Domestic demand growth has been steady for cheese for the last three years. Cheese supplies, he said, are top heavy with respect to demand in recent months.
Bullock sees an even stronger picture for butter than for cheese even though butter supplies are also top heavy. But with butter there is strong domestic demand growth.
“I expect to see continued volatility in butter prices due to inventory coverage issues and strong continued demand,” he said.
The macroeconomic outlook includes indicators of a continuously improving U.S. economy, following the Great Recession. That improving picture includes a lot of indicators of consumer confidence, he added.
The Federal Reserve will likely raise the federal funds interest rate at least three times in the coming year as inflation starts to rise, Bullock predicted. He thinks the 10-year Treasury rate with increase to around 3 percent by the end of 2017. Rises in the interest rate will likely be one-quarter percentage point at a time.