Much has been noted in the past couple years about the state of the dairy industry in Wisconsin. With news stories popping up about exports declining and farms losing a home for their milk, let’s take a macro look at what is causing the past, current and short-term future market conditions.
By: Cody Heller CEO of Central Wisconsin Ag. Services
Source: Jackson County Chronicle
Last week the USDA reminded us in their Cold Storage Report that domestic stocks of butter and cheese are declining at the normal rate for this time of year. The issue ends up being that butter stocks are near record highs for the month of September, while U.S. stocks of cheese are at record highs. There was 5 million more pounds of cheese in storage this September than in 2016. Both 2016 and 2017 set record highs that the industry has never seen.
The reason for all this cheese in storage is generally due to U.S. cheese-makers not bringing their stored cheese to market until prices reach a threshold where they make money. This is a double-edged sword for the industry because the stock will keep increasing globally and as their warehouses get full, the cheese-makers’ demand for milk decreases greatly.
Global consumption of dairy products always increases in the fall as there is an uptick due to the holiday season, especially for butter. The challenge the industry faces is this fall’s consumption isn’t greater than years past, meaning that stocks to use rates will continue to spread further apart.
Moreover, in 2016 the European Union removed their decades-long quota that restricted milk production. Within three months the global market noticed a surge in supply coming from the EU. To make matters worse for the U.S. market, the value of the U.S. dollar was much higher than the Euro. This meant when foreign net importers of milk products went to the market place, they went to the EU before looking to the U.S.
This has major price implications to the producers. With storage levels at or reaching record highs over the past two years, we have seen the greatest “basis” erosion that the dairy market has ever faced.
Cheese plants are faced with difficult decisions on how to minimize their intake of milk without having to do large-scale producer cuts. Generally, cheese plants will cut premiums for quality and quantity, reduce trucking subsidies or pay legal market minimum to wean some high cost producers out of the market.
In 2017, the dairy industry has seen all of these concepts happen at once, thus reducing the “basis” that producers receive above the legal market minimum. In a lot of cases, due to increasing trucking costs, we see a net negative basis for many producers.
This “basis” erosion has some benefits. Wisconsin has largely lived in a bubble of higher prices than the rest of the country. Michigan producers for example, normally receive $2 per hundredweight less for their milk than Wisconsin producers. In the past, this has created a situation where cheese and butter processors have bought milk out of state to fill their capacity instead of buying more expensive Wisconsin milk. Thus, with the “basis” erosion, Wisconsin is more competitive than it is historically. This has allowed cheese plants to absorb some of the excess supply instead of cutting producers.
While the milk market faces excessive supply, there is some positivity on the horizon. The U.S. Dollar is the weakest it has been against the Euro since early 2015 and exporters are now starting to move supplies to foreign buyers. The U.S. Dairy Export Council is aggressively trying to increase exports by five percent, which would send export levels to nearly 20 percent of the country’s milk supply. Unfortunately, this process will take time. In the short-term, inventories continue to grow without equal offsets by global buyers. This will continue to suppress prices, most likely, to levels that are below breakeven throughout most, if not all of 2018.