International milk surplus may limit U.S. dairy producer margins

International milk surplus may limit U.S. dairy producer margins

Rabobank second quarter dairy update finds milk prices lower, supply still in surplus internationally

Within the last eight months, milk prices have fallen while supplies on the international market continue in a surplus, squeezing U.S. producers further.

In review of the second quarter dairy markets, Rabobank Food & Agribusiness Research and Advisory group's Global Dairy Strategist Tim Hunt says producer milk prices in the U.S. are still 15% and 57% higher than those presently being paid to dairy farmers in the Netherlands and New Zealand despite the record prices seen in 2014.

"Sustaining these kinds of premiums is going to get tougher in coming months, as the impacts of an oversupplied international market filter back home," he explains.

Rabobank second quarter dairy update finds milk prices lower, supply still in surplus internationally

Related: Global dairy prices have moved off January lows

The price of key dairy commodities fell further in international markets in Q2, and now sit at the lowest levels since 2009. After falling marginally in Q1, production in key export regions rose above prior years in April as weather improved and EU quotas were removed.

In the face of ongoing weakness in China and Russia, other buyers stepped in to take most of this product, though buy-side stocks are now large and supply-side stocks are also showing signs of growing.

Weaker commodity markets have fed through to the farmgate in regions like New Zealand and the EU, pushing milk prices towards or even below breakeven for producers.

U.S. dairy market better comparatively
The U.S. dairy market has held up better than the international market to date. U.S. wholesale market pricing for NFDM and whey eased in Q2, with product trading in line with international pricing. Yet U.S. cheese and butter prices actually rose and remained at a significant premium to prices in international markets in mid-June, as strong domestic demand for these products, barriers to import and the CWT program kept the market tight.

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"The U.S. dairy market actually grew faster than those of most of the BRIC economies in Q1," Hunt says. "Employment growth, higher wages and lower gas prices helped boost U.S. cheese sales by 4.5% in Q1 in YOY terms. Butter sales are also well up, while the contraction in fluid milk slowed."

Nonetheless, the second half of 2015 is likely to prove a challenging period for U.S. milk producers.

Rabobank expects the international market to remain oversupplied through the coming six months as supply growth continues to outstrip demand, as China continues to rebalance and buyers end their recent stock build programs.

In this environment, sustaining the current premium for the U.S. domestic market through the second half of 2015 is likely to prove an impossible task, according to Rabobank.

"The higher prices in place in the U.S. market are encouraging much greater production growth here than in most regions of the world," Hunt says. "At the same time, exports are falling as processors try to direct more product to the more profitable domestic market, and imports are rising as fast as they can within the constraints of U.S. trade barriers."

This is likely to boost local supply availability faster than the domestic market can soak up, and weigh down on U.S. dairy prices.

"We expect butter and cheese prices to come in considerably below the current levels suggested by the CME forward curve in Q3 and 4, as the international milk glut feeds its way into the U.S. market," says Hunt. "Class III milk could easily be priced at below USD15/cwt by Q4, driving the income over feed costs below USD7/cwt for the average U.S. farmer."

"At global level, we still have more milk than market right now," Hunt says, "and unfortunately U.S. producers are unlikely to get through the next 6 months as easily as current futures pricing suggests."

Source: Rabobank

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