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Dairy should return to profitability by the end of the year

After increasing for six consecutive sales, the overall index at the Global Dairy Trade auction decreased 8.8 percent on Tuesday. The decline was not a big surprise as the recent increases were spurred by what seems to be an overreaction to the drought in New Zealand.  Tim Hunt is Global Dairy Strategist with Rabobank, he says the decline in milk production was not as dramatic as first thought and now the weather has improved.

Hunt is the author of Rabobank’ s Quarterly Dairy Report released Monday which basically calls for continued pressure on dairy prices into the third quarter of this year as production comes into line with demand. He expects China to buy some dairy but nothing like they purchased a couple of years ago.  The Chinese dairy industry is growing and they are slowly rebuilding their image with consumers.

Another major factor in the global dairy market has been the absence of Russia. They stopped buying dairy products from countries which have placed embargos on their products over Ukraine.  Europe was hit hardest by the move.  Hunt says some product has been going through Belarus and Argentina has picked up some of the business but “fundamentally Russia is short of product.”  Supplies are tight and prices are high in Russia.

A big question in the global dairy picture is what will happen when the production quotas in Europe come to an end on April 1^st.   Hunt expects production to increase 1 to 1.2 percent in the remainder of the year but does not see any major expansion of dairy production in the years ahead.  “The cost of production in the region remains high and the environmental compliance restrictions are very tough.”  He says, “It makes expansion in California look like a walk in the park.”  In addition, the acquisition of additional land for a larger dairy operation is extremely challenging as much of the land in Europe is held in small parcels.  “So while producers have the right to expand, there are many constraints on growing the milk supply.”

As for the United States, Hunt sees prices nudging lower for the next few months before production comes into line with demand. He notes U.S. prices were late to react to the global downturn with nothing really showing-up until farmers got their January milk check.  On top of that, many producers have forward-contracted feed and hedged their milk prices so they will not be pushed to cut production.  Eventually production will tail-off about the time lower retail prices spur increased consumer demand.  Hunt expects the Class III price to approach $16 by the end of the year and move above that into 2016.  He expects Class I will gain at least a dollar in that period.  If feed prices stay as expected, Hunt predicts; “After a difficult period in the middle of the year, fourth quarter and first quarter of next year should start to look profitable for the U.S. dairy farmer.”

Hunt talks about the outlook: