It has been nearly five years of relatively low volatility at uncomfortably low prices. Higher milk prices are finally here. Producers are welcoming the improved milk checks, but can the rest of the supply chain absorb these higher prices and maintain demand? The question becomes more pertinent against the backdrop of economic unease around the world as the probability of a U.S. economic recession heightens and economists expect China’s economy to weaken after the Chinese New Year.
Higher milk prices are a result of higher dairy commodity prices. In this case, perhaps the strongest of those commodities globally are nonfat dry milk (NDM) and skim milk powder (SMP). This is a reversal from the past five years when butter was the star. During the rush to capitalize on the surge in butter demand the industry was left with a surplus of skim that weighed down SMP and NDM prices.
This is not to say butter demand is weak. In fact trade disruptions due to U.S. tariffs on European Union (EU) imports could tighten the market in 2020. The U.S. imported 27 million more pounds in 2019 through October than the same period in 2018, yet inventories are only 6.5 million pounds higher than last year. If demand persists, and imports are removed from the equation, the butter market could return to higher levels in the second half of 2020.
Meanwhile, demand for skim has been on the rise. U.S. exports of NDM had been trailing for most of the year, with buyers waiting anxiously as prices climbed, hoping for a break. But the gap is closing and exports are accelerating, up 25% and 17% in September and October, respectively. U.S. manufacturers made an additional 42.8 million pounds of NDM through October this year compared to 2018. Still, inventories as of the end of October are 32.8 million pounds below where they were a year earlier.
Rabobank expects limited global milk production growth in 2020. The U.S. should be slightly below trend at 1.3% to 1.5% year-over-year growth. Combined growth among the Big-7 major dairy regions (the U.S., EU, New Zealand, Australia, Brazil, Argentina and Uruguay) should be at or slightly below 1%.
This relatively flat production will support continued strength in milk prices through 2020. But demand must be viewed with caution as uncertainty about the economy looms.
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