Mark Stephenson, University of Wisconsin-Madison director of dairy policy analysis, expects the export market for dairy products is likely the key to improved milk prices for 2017.
Stephenson spoke Jan. 19 at the Wisconsin Agricultural Outlook Forum held at UW-Madison. He predicts exports will increase as the year continues.
“I don’t expect to see anything dramatic until we’re about halfway through the year,” Stephenson said. “I think 2016 for dairy farmers is one of those years where you say, ‘I’m glad it’s behind me, I’m ready to move on,’ and I think that 2017 is going to feel a little bit better.”
Strong domestic sales
Despite 2016 being a challenging year for dairy producers, Stephenson said there were a couple of positive trends. Domestic sales of dairy products were very good.
“Both cheese and butter consumption was up about 8% per capita in 2016, and we anticipate continued growth in the year ahead,” he noted. Cheese consumption hit a milestone at more than 35 pounds per capita — more than double what people were eating four decades ago. “We should have opportunity for continued growth.”
But Stephenson was quick to point out not all consumption numbers have been positive. “Fluid milk consumption has been on a downward trend for as long as cheese has been going up. Per-capita consumption is today one-third less than it was 40 years ago. Ice cream and frozen products have also declined,” he said.
On an all-products basis, per-capita consumption of milk has been increasing at a rate of about 2 pounds per person per year in the U.S., according to Stephenson.
“We are also adding almost 3 million people to the U.S. population every year. Combining population and per-capita consumption growth, we will need about an extra 2.5 billion pounds of milk to satisfy domestic demand growth in 2017.”
He noted that the U.S. unemployment rate is below 5% and at levels that are considered to be full employment. “And in the last quarter of 2016, we began to see wage growth again,” Stephenson explained. “There are, in fact, very few statistics that suggest anything but steady growth in the U.S. economy. This will support continued growth in the domestic sale of dairy products in 2017.”
More milk per cow
Another high-impact trend in the dairy industry is the growth in the efficiency of milk produced per cow.
“This has been a very linear trend of about 284 pounds of increased milk per cow per year,” Stephenson said. “Given this growth in productivity, the math would suggest that we only need the milk from a little more than 8 million cows to satisfy our current domestic needs. However, we have more than 9.3 million cows in the U.S. herd. The rest of the sales are a result of export demand.”
Dairy farms react to changes in farm profitability, Stephenson pointed out. “High profits are the signal from customers that the market wants more milk. The additional profit provides not only the message, but also the wherewithal to produce more milk. Low profits are just the reverse. As margins contracted from the highs of 2014, milk production growth has also declined, but we have seen an increase in growth in the last half of 2016.”
Although milk prices are well off their peak set in 2014, feed costs are also well below their high-water mark in 2012-13.
“As farm profit has begun to improve, farms are cautiously responding with greater milk production,” Stephenson said. “2016 began with very modest increases in milk production, but it ended with the U.S. milk supply up about 2.5% above year-earlier levels in the last two months. I expect continued higher-than-average growth in milk production throughout 2017 but probably no more than the 2.5% to 3% levels.”
Stephenson said the U.S. is in a good position with increasing milk production to recapture some of the export market share that was lost over the last two years.
“We may even be able to increase our customer base,” he said. “I am forecasting the U.S. all-milk price will increase from $2 to $2.50 in 2017. I expect the trajectory of the price change to be steady through the first half to maybe the first three-quarters of the year. After that, it will significantly depend on what the rest of the world does in response to the improved price. A 1% or 2% change in exports can put downward pressure on our milk prices.”
Todd Hobbs, an associate professor of agriculture commerce markets at University of Illinois, believes U.S. farmers will plant more soybean acres in 2017. Hobbs also spoke at the Ag Outlook Forum.
“The 2017-18 marketing year is dependent on acreage allocations for soybeans,” he said. “Planted acreage is expected to increase substantially in 2017 due to lower corn and wheat prices and the lower cost of producing soybeans relative to corn.”
Recent soybean yields make it difficult to predict possible yield potential in 2017.
“Three consecutive years of yield substantially above trend creates a conundrum,” Hobbs noted. “A yield of 48 bushels per acre with 4 million more planted acres would result in a 2017 crop approximately 140 million bushels smaller than the 2016 crop. Despite the smaller crop, 2017-18 ending stocks would still increase, even with strong demand potential in export markets and domestic crush levels. The potential for demand growth in export markets is present, but requires negative developments in South American soybean production.”
According to Hobbs, soybean prices are expected to average around $9.40 for the current year and near $8.90 during the 2017-18 marketing year, if world production unfolds as expected during 2017. He urged farmers to lock in a soybean price now because of where prices might be headed later in 2017.
Corn and soybean prices weakened considerably in 2016 from the record levels seen from 2010 to 2013, Hobbs said.
“While 2016 halted a declining trend in both corn and soybean prices, this was due to a crop shortfall in South America,” he explained. “Large world stocks for corn and soybeans are building as massive crops are realized in this marketing year. The expectation of large production levels across the globe is building ending stocks in both the U.S. and the world. Continued price weakness should be expected without a production shortfall in one of the world’s major producers.”
Corn prices are currently suffering from the large stocks generated under four consecutive big crops in the U.S.
“Corn exports were strong through the latter half of 2016 due to a poor corn crop in South America, but export demand may weaken in the second half of the marketing year if corn production in South America meets current projections,” Hobbs cautioned. “Domestic corn demand growth is slow with some positive development occurring in ethanol production and potential higher feed use than in 2015-16. Ethanol production is running 2% to 3% above last year, as gasoline demand maintains strength and lower corn prices improve ethanol crush margins.
“If world production and domestic demand unfold as expected, prices will average near $3.34 per bushel during the current marketing year and near $3.65 during the 2017-18 marketing year,” Hobbs said.