Three market analysts sat down at the MILK Business conference to discuss just that. Here’s what they had to say:
Mike North, Commodity Risk Management Group
“We’re at an incredible crossroads in the dairy industry. Today we have as many cows as we did in 1996, shortly after I got into this business. There are a growing supply of products pretty much across the board. We’ve had an incredible growth in exports over time, and our dollar has weakened so we’re hopeful that opens some doors as we head into 2018. But we are sitting at a time of the year when the market generally makes its peak we’re heading into a time of the year when we’re not consuming product. We’re making product and adding to inventory and so there’s this massive collision of increased supply. What will be diminishing demand in the next six to eight months and the outlook is relatively dark in my opinion.
“So as I look at these markets there is that old adage of something’s got to give, and we are trying to figure out what that looks like. Will China be the rescuer of U.S. inventory and come in and scoop up a whole lot of product this January when they get into their new calendar year their new fiscal year? Perhaps. Will we see a massive reduction in cows? I don’t believe we will, because the prices that we’re carrying right now are just bad enough for us to grumble about.
“I’m a little sour about where we are headed into 2018. And to me it feels a lot like what we saw in 2016. At that point in time, we were showing a lot of $16 to $17 prices now. You know we fully have to admit that 2018 futures are only showing us $15.25, $15.50. You know the back end of the year is at $16 but we’re not getting the picture that those are going to go higher. We could go lower.”
Bryan Doherty, Stewart Peterson
“Well, it’s tough. Maybe to counter Mike a little bit from a different angle, the old saying is known fundamentals are useless fundamentals. All the things Mike talked about the market knows, perhaps in theory it’s priced in and we’ll see demand start to really pick up and respond. Markets move on perception, they move on momentum, they move on attitude. Right now the perception is ‘hey there’s a lot of inventory so I as an end user, I don’t have to jump. There’s no urgency there’s more of it coming.’ So we don’t have that perceptive attitude in the marketplace right now, there’s not a sense of urgency. In agreement with Mike, I think you need to be defensive on milk prices. How lower can they go? If you’ve been around a while they can go lower. Never try to guess what the market can do. I just looked this morning for an example, we’re first quarter averaging about $15.15 and the average low in the last 11 years is $14.43. So there’s downside risk for the first quarter and the second quarter $15.30 for the average now, compared to a $14.11 low. It doesn’t sound like a lot, but that’s the average. Remember we’re in a high production year and right now you guys are doing what you should do when the market isn’t offering you something, you produce and do it well.
“I with Mike agree we should be prepared for lower prices, before higher prices. I don’t think we’ve seen those market clearing forces come in and tell us to change. This is a prime example of how high prices cure high prices and low prices cure low prices. I’m not sure we’ve got low enough.”
Scott Brown, University of Missouri
“I think it is tough when you look in the very short term of how we get the export side to the pull us up to keep prices where they are higher. When you look at where we sit today with international prices moving lower it’s not just a supply situation in this country that’s at play, as well the rest of the world is also coming back with some additional supplies of milk. We have a lot of stocks overhanging markets globally as well. It’s just hard to find that demand side is going to pull us now domestically.
“I think we have seen some very strong demand for dairy fat in particular. I don’t care if you look at ice cream butter or whole milk you name the product, we like it with more dairy fat in it. That’s been a real change and if it continues as we look ahead into 2018, it will help buffer what otherwise would be a much tougher price situation.”