For dairy farmers who were betting the “three-year cycle” would shore up balance sheets, 2017 become a supreme disappointment. The year was modestly profitable for the lowest-cost producers, but for the average farmer, milk checks have failed to generate significant profits, if any at all.
In several parts of the U.S., including the Midwest and Northeast, milk supplies again exceeded processing capacity, adding negative financial pressure in an already mediocre pricing year. Several processors in those regions have eliminated or reduced premiums paid to farmers, and in some cases, tacked on fees and other disincentives to limit growth in milk production.
But even though it may not feel like it to you or your banker, 2017 is still on track to post the highest annual average milk price in the last three years. Milk prices averaged $17.62 per hundredweight (cwt) last year, which is higher than the $15.93 average from 2016 and the $17.13 average in 2015. For those of you that believe in the three-year market cycle, you might consider this the “peak year.”
Obviously, the three-year high is disappointing. During the 2014 peak, milk prices averaged an enjoyable $23.97 per cwt and in the 2011 cycle high, $20.14. Perhaps you’re thinking to yourself, “Surely, prices are going to reach a higher peak than $17!”
Recently, analysts have started sounding the alarm bells and are warning that the global milk pricing cycle highs are already behind us. In October, Rabobank published a report showing “concrete indicators” of sustained supply growth, meaning lower prices are coming. The bank pointed to Europe and New Zealand, where milk production is increasing by more than 2 percent and is expected to continue to expand throughout 2018 and beyond.
The U.S. Dairy Export Council wrote a concurring report and warned that already huge milk powder inventories are again increasing in size. Beginning in 2014, the European government began purchasing a total of about 8.6 billion pounds of milk-equivalent supply in the form of milk powder. That’s equal to approximately two years of growth in the U.S. milk supply.
Then in September, the European regime added another 238 million pounds of milk-equivalent to their stockpile following higher-than-expected milk production.
Now, leadership in the European government has indicated that it desires to sell these massive inventories back to the market. This news is weighing on market sentiment. The regime has started holding tenders to unload these stocks and has lowered their asking price. Even so, the market has been reluctant to pay up. In reality, it will probably take years to dispose of a stockpile this big.
For the foreseeable future, the existence of these inventories will continue to limit market prices for protein-laden dairy products including milk powder and dry whey.
But it’s not all bad news, and the milk market is not falling apart, despite all of the negativity. Looking ahead to 2018, we are not approaching a “2009-like” scenario. Even though dairy proteins are oversupplied, milkfat is tight globally and will likely remain in short supply throughout the upcoming year. Much like 2017, the fat side of your milk check is going to pay the majority of the bills in 2018.
Now it’s important to understand where the growth in milkfat consumption is and is not occurring. Despite the news reports that fat is again in vogue, this year we are not seeing consumption surging in the U.S. like in years past. So far in 2017, milkfat consumption has increased at the slowest rate in three years. While fat production has risen by about 2.8 percent, domestic fat use has only increased by approximately 1.8 percent.
And it’s not just milkfat consumption that is slowing. Across most categories in dairy, growth has been trending lower or negative. This year, retail cheese and butter sales have struggled to post any growth. Sales of fluid milk and yogurt have declined. Additionally, restaurant revenue is increasing at the slowest rate in eight years. To sum it up, domestic demand was sluggish in 2017.
If it hadn’t been for new export customers, the U.S. would have been oversupplied with dairy solids. Milk prices would have stayed painfully low.
Looking ahead into 2018, I am not expecting these national demand trends will change course. However, I do expect milk production will increase at a slower rate next year, between 1.4 percent and 1.6 percent. Due to higher components in the milk supply, I expect total milkfat production will increase by about 2.5 percent.
That means marketers will be searching for new buyers, and in a weak local demand environment, those customers will be found outside of U.S. borders. That also means exports will be the critical factor supporting milk prices in 2018.
Right now, exporting signals are mixed. Globally, demand has been robust. During the first nine months of 2017, international dairy trade increased by about 4.5 percent year over year, led by growth in China.
During the summer and early fall, U.S. manufacturers were able to grow export sales at the expense of European dairy manufacturers. For several months, U.S. product prices for cheddar, butter, milk powder and whey were below prices in Europe and Oceania.
From an international buyer’s perspective, U.S. dairy products were on sale. During August, the U.S. shipped 14.7 percent of its milk solids produced during the month to foreign customers. This was a 12-month high.
However recently, export business has become more difficult as prices have declined in Europe and Oceania. Looking forward into the early part of 2018, U.S.-based manufacturers were able to book sales into markets like Japan and South Korea – regions known to purchase far in advance. But in other parts of the world, U.S. manufacturers are going head-to-head in the marketplace against the Europeans to find customers.
This is because U.S. dairy commodities are no longer at a large discount below international prices. Following massive increases in milk production elsewhere, markets in Europe have decreased and some products, like cheese, are now selling below comparable levels in the U.S. In a competitive environment like this, prices typically decrease.
Taken together, 2018 is not likely to be extreme. Milk pricing in 2018 is expected to land somewhere in the middle between price levels in 2017 and 2016. JDG Consulting conducts a monthly survey of leading dairy economists from academia and industry, and in the latest survey, the average 2018 forecast Class III price was $15.75 per cwt versus a $16.24 average in the first 11 months of 2017. The average Class IV price forecast was $14.68 versus an average of $15.31 January thru November 2017. 
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Matt Gould
- Dairy Market Analyst
- Email Matt Gould
