Higher dairy prices are on the horizon

By Beth Newhart contact

- Last updated on GMT

With the 2020 US election looming, the US dollar is expected to be volatile and affect global dairy. Pic: Getty/sergeyryzhov
With the 2020 US election looming, the US dollar is expected to be volatile and affect global dairy. Pic: Getty/sergeyryzhov

Related tags: Milk production

As the year's fourth quarter wraps up, Rabobank's RaboResearch looks back on global dairy's performance in 2019, and ahead to 2020. Milk production and prices are up, leading to challenges for producers.

Milk and dairy product prices are on the rise and passing through the supply chain to consumers. This combined with lower feed costs is resulting in higher on-farm margins for US dairy farmers.

But while global dairy producers have been waiting for a return to price levels similar to those in 2014, a new report from Rabobank discusses anxiety over consumers’ ability to withstand widespread price increases.

Ben Laine, RaboResearch dairy analyst, said, “Higher commodity prices are a welcome change for dairy producers. However, as those prices work through to consumers, their willingness to pay higher prices at restaurants and grocery stores remains to be seen, with much of the world either recovering from, in the midst of, or on the verge of some degree of recession.”

Rabobank projects improved milk prices at the farmgate, but hesitation on either end of the supply chain. Producers are holding off on expansion despite the positive price signals in case higher prices can’t be absorbed by consumers.

US milk production posted 1.3% increases in both September and October. An additional 5,000 cows joined the national milking herd in each month, and milk per cow increased by 1.8% in September and by 1.7% in October.

The improved farm margins in the US will drive total year milk production at about 1.5% in 2020. But the potential of a US recession in the second half of 2020 could stall domestic demand growth.

In trade, the US has put tariffs on dairy products from the EU. Rabobank said this is leading to substantial front-loading of imports in anticipation, including butter.

EU milk production is expected to grow modestly in 2020, and the region faces obstacles to herd expansion like environmental regulations. The German, French and Dutch dairy herds have all been shrinking in 2019.

In 2020, Rabobank projects EU milk production to grow at 0.7% and farmgate milk prices to improve in the first few months of 2020. Pasture and growing conditions during 2020 will also be crucial for EU milk supply growth.

With the 2020 US election looming, Rabobank said volatility in the US dollar is one of the only certain outcomes.

“How other currencies perform against a stronger US dollar, in a setting of elevated commodity prices will be important for both global dairy demand and future commodity price direction,”​ the report said.

In China, Rabobank said favorable milk prices are driving herd expansion and increased milk production. Their domestic market should be well-supplied in the first half of 2020. And higher than normal carry-in stocks could lead to less reliance on imports.

Chinese milk production grew by 2.5% between Q1 and Q3 2019, implying an approximate 4% YOY increase in Q3. The strengthening milk prices and dairy farming profitability has renewed interest in expanding China’s dairy herd.

In this report Rabobank raised its milk production growth estimate for China to 2% in the second half of 2019. It still expects 2% YOY growth for the first and second half of 2020.

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