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POSITIVE DAIRY RUN: There is lots of optimism that dairy prices will continue their positive run well into 2020. Trade deals and less-than-ideal weather in Australia and New Zealand could open new opportunities for dairy exports, increasing demand.

Look ahead to 2020 dairy prices with optimism

Dairy Notes: Class I dairy prices are at their highest level since 2014.

Last year was the turning point for U.S. dairy prices.

Global milk surpluses combined with burdensome dairy stocks that had weighed on the market and returned to better balance, and dairy prices finally began to climb in early 2019.

Fluid prices rose steadily throughout the year, reaching a Class I mover of $19.33 per cwt for December. The January 2020 Class I mover was $19.01 per cwt, down 32 cents from December but still a sizable increase of $3.89 over January 2019. You have to go back to 2014 to see a January Class I mover this high.

USDA and many industry observers believe 2020 dairy prices will go even higher. Long-awaited international trade deals have finally emerged and could help the dairy industry to recover.

Cow numbers creeping up

While the number of milk cows dropped steadily throughout 2018 and in the first half of 2019, this trend reversed after June when cow numbers started inching upward again.

Increasing cow numbers, combined with nonstop growth in output is leading to growth in milk production. This is particularly evident among the top 24 dairy states that USDA reports in its monthly Milk Production releases.

The November Milk Production report, released Dec. 18, showed the top 24 dairy states up 0.9% from November 2018. New York production was up 2.0% due to an increase in the number of cows and growth in per-cow output. Vermont showed a production increase of 0.5% with fewer cows but growth in output. Ohio was up 0.7% primarily on growth in output. But Pennsylvania saw a milk production decrease of 1.7% due to a sizable drop in milk cows — 24,000 — compared to November 2018.

Some industry observers are questioning if recent growth in production per cow can be sustained. While USDA estimates about 1.7% growth in production per cow, others think that 1.2% to 1.3% may be more realistic. Delayed plantings and a very wet growing season last year led to less-than-optimum feed quality and quantity that may be a factor in per-cow production growth.

Prices go higher, except for butter

The latest USDA dairy forecast has 2020 milk production up 1.74% over 2019

Higher cheese prices are expected; $1.865 per pound vs. $1.760 per pound in 2019.

Dry whey is expected to be a bit lower in 2020, but that could change if China starts buying U.S. whey again to feed its recovering swine population.

Butter prices are expected to go lower in 2020; $2.020 per pound vs. $2.240 per pound in 2019. However, nonfat dry milk is expected to go higher; $1.230 in 2020 vs. $1.040 in 2019.

All dairy product price forecasts were raised except for butter. USDA also raised its Class III and IV price forecasts.

The all-milk price forecast for 2019 was left unchanged at $18.60 per cwt. The 2020 all-milk forecast is raised to $19.40 per cwt, 55 cents higher than the previous forecast.

Prices are expected to be lower in the first quarter of 2020, then strengthen during the second half of the year.

Lots of trade activity

The final months of 2019 provided lots of activity as three important U.S. trade agreements saw movement.

The September U.S.-Japan trade agreement was followed by the U.S.-Mexico-Canada Agreement and then the U.S.-China phase-one trade deal in December.

While most U.S. ag leaders are hailing the three deals as a positive step forward, others have expressed cautious optimism. While the benefit of USMCA to U.S. dairy appears more obvious, the Japan agreement is less so, and the China deal is even less than that. Like all trade agreements, only time will tell of the true benefits to U.S. dairy and agriculture.

The U.S.-Japan trade agreement allows renewed access to the Japanese market, which many believe will lead to an additional $7.2 billion in U.S. ag exports to this growing marketplace. Most dairy industry trade groups praised the completion of phase one of this new agreement and are urging quick action on finalizing phase two to include more dairy.

USDA reports that Japan imported $14.1 billion of U.S. ag products in 2018, of which $5.2 billion was duty-free. The phase one agreement calls for a reduction or complete elimination of duties on an additional $7.2 billion in U.S. ag products.

The new trade deal with Japan should help level the playing field amongst countries that export dairy products to Japan. Prior to this agreement, other nations had preferential treatment with Japan under the terms of the Trans-Pacific Partnership (TPP), which President Donald Trump pulled out of in 2017.

The U.S. Dairy Export Council reports that Japan has tripled its purchases of U.S. cheese in the past 10 years. Japan is the second-largest importer of cheese, behind the UK. In the past, a good deal of Japan’s cheese imports came from New Zealand and Australia. Both countries are facing difficult times with weather-related issues that are affecting ag production.

Hopefully Japan will turn to the U.S. to help supply its growing demand for cheese in 2020.

USMCA was finally passed in the U.S. House of Representatives on Dec. 19. The Senate is expected to approve the trade deal soon.

USMCA replaces and updates the North American Free Trade Agreement and should provide benefits for U.S. dairy exports. Mexico and Canada are two of the most important destinations for U.S. dairy products. The new agreement includes rule changes that should eliminate some key distorting policies in Canada, such as the Class 7 program. In addition, U.S. dairy products will gain an extra 3.6% access to the Canadian dairy market. Canada has become the third-largest export market for U.S. dairy products.

The trade deal also strengthens relations with Mexico, the No. 1 market for U.S. dairy exports. The U.S. Dairy Export Council and National Milk Producers Federation estimate that once implemented, USMCA will improve dairy farm revenues by $548 million in the first six years.

The phase one trade deal between the U.S. and China was announced on Dec. 13, ending the 18-month tariff battle between the two countries. The exact details of the deal have not been released, and there are varying degrees of optimism and pessimism about what the deal will mean for agriculture.

U.S. trade officials announced that China had agreed to increase purchases from the U.S. by $200 billion over the next two years, including $40 billion to $45 billion per year of U.S. ag products.

A few years ago, pre-trade war purchases of U.S. ag goods by China topped out at around $25 billion. If China does indeed end up purchasing $40 billion of ag goods, that will represent an increase of $15 billion per year.

How much this deal will benefit U.S. dairy remains to be seen. The only thing worse than no deal is a bad deal

World outlook

Less-than-ideal dairying conditions have been plaguing major global exporters.

New Zealand milk production has suffered with bad weather issues, and Australia has been battling drought and devastating wildfires. Both countries have seen their dairy industries hit hard.

Should a few major global dairy exporters like these fall short of fulfilling demand, there may be a wider opening for U.S. dairy exports in 2020.

Latta is a political and economic consultant for Northeast Dairy Foods Association Inc.

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