That growth in turn is hurting dairy prices according to Daniel Basse, president of Chicago-based agricultural research firm AgResource Co.
Basse gave his market projections during an Oct. 12 Professional Dairy Producers of Wisconsin webinar.
He said beef prices have declined 40 percent from their highs in 2014 and 2015. At the same time, feed prices have fallen making it easier for dairies to hold onto cows.
The October USDA World Agricultural Supply and Demand Estimates report said, “The milk production forecasts for 2016 and 2017 are raised from last month as the cow inventory has grown more rapidly than previously expected.”
Basse said the U.S. dairy herd is at a 20-year high.
Dairy farmers should consider culling unprofitable cows this winter. Basse expects beef prices will rally in November and will decline again in January or February.
Digging further into the beef industry, he said meat packers are finally turning a profit after several years of slim margins. Packers have more or less retained high retail prices of the past few years.
Cow/calf producers are finding profit as calf rearing margins improved. Feedlots have been hardest hit with little profit per head.
“The dairy outlook is too much supply and product stocks,” Basse said. “Over capacity of dairy cows and milk are going to bedevil us.”
Big cow numbers and milk surpluses have left dairy producers with “profitability scraping around a negative margin.”
Basse has been telling his clients if they find a Class III futures price rally at $16.50, they should take the opportunity to lock in a profitable milk price.
He does not see significant improvements in dairy.
Milk production is high and mounting dairy storage supplies create a price ceiling. The market can’t go much higher unless there is a change in policy, cull rates or exports.
There is a surplus of dairy products in storage, Basse said. Butter could be problematic in the spring if not enough butter stocks are moved as storage space tightens.
U.S. butter became globally competitive for the first time since January 2015. “We have really seen a rally in EU and Oceania prices,” he said. Cheese and milk powders have been competitively priced to help move more product offshore. Powder will not be a price booster, though, as Basse projects a slow price recovery.
“Powder does not have much of a downside, but it needs more demand to turn upward,” he said.
Basse reminded listeners that dairy is a global market. U.S. and global prices for cheese and powder have come into alignment. U.S. butter prices have finally fallen below world butter prices and should help push butter out of inventory.
New Zealand’s dairy herd has started shrinking. The Oceania region, including New Zealand, accounts for almost half the world’s dairy exports. Less Oceania milk for export opens potential markets for U.S. dairy product purchases.
The demand hot spot is Southeast Asia. It was the primary driver during past price rallies, which is why so much attention is given to these countries for export opportunities. Other global regions have remained relatively flat.
China’s dairy buying has been sporadic. Their purchases would have to become more regular to help boost prices. “They have been residual buyers at best,” Basse said.
The EU is still sorting out its dairy future since its quota system ended in 2015. German and Dutch milk production has leveled off, but other countries, like Ireland, are still generating double-digit growth.
Russia’s demand for dairy imports will grow in the coming year and will provide opportunities to countries not locked out of the country due to economic sanctions.
Because domestic per capita milk consumption is at a record all-time low, Basse said, the dairy industry needs to take a hard look at the market. He said the average American consumes more beer than milk, and with all of the beverage choices on the shelves, Basse expects fluid milk consumption will continue to decline.
The industry needs to take serious look at a “craft milk” approach, Basse said. He suggests products similar to the Fairlife product, where milk’s protein and fat contents are rearranged. He said they seem to sell well among millennial shoppers, who are becoming a larger segment of U.S. consumers.
Source: LancasterFarming
Link: http://www.lancasterfarming.com/farming/dairy/the-beef-in-dairy-s-price-headache/article_005fac77-b83c-5e7e-b722-9259a328bede.html