U.S. dairies getting by, despite low prices, abundant world stocks
WASHINGTON, April 20, 2016 - So far, the U.S. dairy sector
is swimming along fairly well through a flooded world market.
American dairy farmers have a mixed bag economically this
year, starting with a national producer milk price of $15.70 per hundredweight
(cwt), its lowest in nearly six years. Thus, many small or less efficient dairy
farmers, who saw prices over $20/cwt in most of the past three years, are
losing money. What’s more, USDA this week projected
the all-milk price will linger around $15 through 2016, with manufacturing
grades at $13 to $14.
U.S. milk producers are increasingly dependent on sales
abroad, and Bob Yonkers, chief economist for the International Dairy Foods
Association, points to three factors in the world arena “that have really kind
of put us into this lower price environment.” He pointed to the European
Union’s final phase-out of its milk production quotas and its farmers’ surge in
output, the trade sanctions that led to Russia’s suspension of dairy imports
from Europe, and China’s reduced pace of dairy imports stemming from its
economic slowdown.
The result is such an abundance of dairy products that the
United Nations’ Food and Agriculture Organization’s dairy prices
index has plunged to its lowest since June 2009, owing mostly to low butter
and cheese prices. So despite the U.S. dollar’s strong exchange rate, which makes
American products more expensive abroad, softer prices enhance sales volume,
and the recent years’ huge run-up in dairy exports has slowed only modestly
overall (see graph). U.S. non-fat dry milk exports, now going for a very cheap
74 cents a pound or so, broke a record in 2015 and were up 14 percent in
January and February, compared with the same months in 2015. The downturn,
meanwhile, is most acute for butter, which goes for about $1.20 a pound on the world market, or
at least 80 cents less than U.S. wholesale prices. With such a disparity, U.S.
shipments abroad fell 70 percent in 2015 versus 2014, and 44 percent in the
first two months of 2016 versus that period in 2015. Meanwhile, U.S. butter and
butterfat imports, though still a
small slice of this country’s consumption, have soared.
Nonetheless, higher
milk output and rising dairy inventories aren’t killing U.S. markets so far. The
latest stocks report, for February, showed butter supplies up 32 percent from a
year earlier, and cheese inventories up 11 percent. The current $2.05 a pound for
butter remains unusually high, and cheddar cheese blocks at about $1.43 are
low but fairly normal in the springtime market.
Says Yonkers: “I’m still kind of wondering why our domestic
prices are staying up as high as they are,” despite the butter stocks buildup
and surging imports, though he expects a lot of buyers who couldn’t build up
their stocks from the seasonally brisk fall markets in recent years (because
prices stayed high) may be filling their autumn needs early this year.
John Newton, economist for the National Milk Producers
Federation (NMPF), takes a similar view. The U.S. dairy sector has often
operated well with relatively ample stocks of products, he said. “On the butter
side, inventory levels are high, but we’re going into ice cream season,” and
milk fat is marketed in Greek yogurt, as are whole milk and cheeses. “So there
is still ample demand for milk fat going forward,” he said.
In fact, said Jerry Cessna, dairy economist and forecaster
for USDA’s Economic Research Service, Americans’ growing demand for those
high-milk-fat products is a big reason that 2016 will
manage to be a steady
year for the U.S. dairy sector, using up the added domestic and imported milk
products. Cessna projects total commercial use of milk for 2016, measured on a
milk-fat basis, will jump 4 percent over 2015, and year-end commercial stocks
will sink below year-earlier volumes.
Cessna says farmers continue to increase milk output
modestly, despite their shrinking milk checks, largely because of low feed
prices, compared with the grain and forage costs of recent years. Besides, he
points out that prices for culled dairy cows are very low, persuading farmers
to retain the cows longer, which adds to milk output. “With the input prices
being so low and cow slaughter prices so low, that mitigates some of the
pressure to reduce the milk supply,” he says.
Meanwhile, few farmers have cashed in so far on USDA’s Dairy
Margin Protection Program, now in its second year, which allows a producer
to ensure a minimum spread between cow feed costs and the price of milk. For a
nominal fee, USDA gives enrollees insurance that pays off if the spread falls
to under $4 per hundredweight of milk, and they can buy a margin of protection
of up to $8 spread by paying premium rates. But so far, the actual margin
scored by USDA has remained greater than $7.50 most of the time, thus paying
few indemnities.
Jaime Castaneda, NMPF senior vice president, says the
program is working well since it was designed as insurance against heavy losses.
“It was created to save the farm, not enhance income,” he said. “This is not a
big consolation while we have low milk prices,” he said, but, except for
Canada, with its supply management program, “we actually have better prices
than anybody else. Our farms… are certainly doing better than most farms in the
big exporting countries of New Zealand, Australia, Latin America and,
obviously, Europe.”
Rob Vandenheuvel, general manager of the California-based
Milk Producers Council, points out that a change USDA announced in
MPP this month is a significant help to the typically large dairy farms in
his state. Up to now, farmers had to choose the same level of coverage for all
milk that they insured, up to 90 percent of their production. Now, all farmers
can enroll 90 percent of production at the almost-free $4 margin coverage, and
then purchase higher coverage on just the share of that they want to cover at a
higher level, he said. That will make MPP much more useful for farmers
protecting their farms, he said.
#30
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