Regional, national and international factors impact the entire U.S. dairy industry supply chain. In Progressive Dairy’s look at the 2023 “State of Dairy,” we turned to two dairy market analysts working with large financial institutions for their perspectives.
Tanner Ehmke is lead economist for dairy and specialty crops in CoBank’s Knowledge Exchange research division. Prior to joining CoBank, Ehmke served as a commodities analyst at an ag market research and advisory firm and worked as a commodity markets reporter for Dow Jones at the Chicago Board of Trade. CoBank is a member of the Farm Credit System.
Lucas Fuess is a senior dairy analyst for RaboResearch Food & Agribusiness and is based in Chicago. Before joining Rabobank, he served as director of dairy market intelligence at HighGround Dairy, where he was responsible for leading the dairy market analysis group. Prior to that, he spent seven years at Glanbia Nutritionals as a dairy analyst and economist.
Q: What national factors will have the biggest impact on U.S. dairy producers and the domestic industry?
FUESS: Cost of production and margins: All eyes are on the milk price in the coming months. Price pressure, coupled with high cost of production, could mean that some dairy farmers might struggle to achieve profitability this year.
Even if cow numbers contract, Rabobank still expects stronger milk supplies this year versus 2022. This additional volume, coupled with a return to growth production in the European Union (EU), means that demand will need to keep pace.
EHMKE: Elevated production costs, labor tightness, rising borrowing costs and a financially stressed American consumer looking to save on grocery bills will be key national factors impacting both dairy producers and processors in 2023. A recession would further erode demand for some dairy products; the severity is the wild card.
Q: What international factors will have the biggest impact on U.S. dairy producers and the domestic industry?
FUESS: China’s demand, or lack thereof, should be a key global price driver this year. As China moves past its COVID-19-abatement policies, it is expected that dairy demand will climb into the second half of this year and would be a bullish driver for milk prices.
EHMKE: The duration of Europe’s recovery in milk production and China’s struggles with rising COVID-19 cases will impact the entire U.S. dairy supply chain. The size of the South American grain and oilseed harvest will also affect producer margins this year.
Q: The U.S. should keep an eye on which country or region when it comes to potential short-term impacts? Long-term impacts? Explain.
FUESS: In the short term, it will be important to monitor milk production from the European Union into the spring flush period. In recent months, milk volume from the EU has been much larger than expected, contributing to the global bearishness that has permeated the marketplace.
On a longer-term basis, little to no milk production growth is expected from the EU and New Zealand, both key competitors versus the U.S. in supplying the global marketplace. Varying restrictive factors, including government regulations, sustainability efforts and costs make dairy production growth untenable in those regions, providing the U.S. opportunity to continue to grow exports throughout the next decade.
EHMKE: China’s lifting of COVID-19 restrictions will have both short-term and long-term economic effects on dairy demand. The spike in COVID-19 cases during the mass migration of the Lunar New Year may have far-reaching effects on China’s vast unvaccinated and elderly population, which will negatively impact their economy and consumer demand. Longer term, the reopening will allow their economy to grow at a faster pace once COVID-19 cases moderate, underpinning dairy demand.
Q: Through the international prism, what provides the most optimism for the U.S. dairy industry in 2023? What are the biggest concerns entering the new year?
FUESS: The most optimism stems from a renewed need for dairy products in China, a bullish driver of higher milk price forecasts into the second half of this year. However, this buying is not guaranteed, with some concerns that China can increase supply in its domestic market with its growing internal milk production, reducing the need for significant imports and leaving the world oversupplied with product this year.
EHMKE: China’s economic recovery offers the most optimism in 2023. With China being the world’s largest dairy importer, a strong economic recovery later this year will drive new demand. The biggest concern is the slowing global economy and geopolitical risk with Russia and China that could impact trade. On the supply side, a longer-than-expected recovery in European milk production would hold international dairy product prices lower for longer at a time of elevated production costs in the U.S.
Q: Any other “hot button” items we should be watching in the year ahead?
FUESS: After a year where “everything” cost more money and inflation climbed to multidecade highs, attention is turning to the possibility of any price corrections materializing. Inflation is showing some signs of easing, but the U.S. remains far from entering any sort of deflationary environment. Most attention will be on farmer cost of production and its impacts on profitability in a year where milk prices will be lower versus the prior year.
EHMKE: Energy prices will moderate as the U.S. and world economies slow in 2023. Labor will remain perpetually tight, even through a recession, unless the recession is severe. The Federal Reserve will pause interest rate increases at 5.25%-5.5% this spring and subsequently put rates on hold to evaluate the impact on inflation. Trade agreements outside the U.S. will continue to move forward, while the U.S. will remain absent from trade negotiations under the current administration. Transportation costs will continue to drop as the U.S. and world economies slow. And feed costs will moderate as the record-size South American soybean and corn harvest comes to market, while chances of El Nino bringing drought relief across important crop-growing regions of the U.S. raise yield prospects for the 2023 U.S. harvest. Ukraine, though, will remain a wild card with the export channel through the Black Sea scheduled to expire in March. Should Russia discontinue the negotiation, that would put upward pressure on grain and feed prices.
Q: Personally, what’s your perspective on the “state of dairy"?
FUESS: While short-term challenges seemed to be weighing on producer moods more prevalently as we began this year, in the longer term, the U.S. is well poised to capitalize on the growing global demand for dairy products. The export market will continue to increase in importance throughout the next decade, with increasing amounts of U.S. dairy moving overseas. This demand growth will allow U.S. producers to continue to grow milk, with a reliable avenue available to move product to. The global opportunities are huge, and it is up to the U.S. industry to capitalize on them amid declining competition from other key global dairy-producing areas.
EHMKE: After coming off a record year for farm incomes and stable to strong processor margins, 2023 will be a year of margin tightening. Farmers will see margins erode as milk prices moderate amid elevated production costs, and processors will face growing pressures to lower prices as retailers and restaurants struggle with a financially stressed consumer. A recession, though, may offer opportunities for dairy processors looking to make acquisitions or expansions when the costs of labor and construction materials are down.
