American dairy producers benefited from a global drop in supply last year, but milk production is picking up now in other exporting countries. By Carol Ryan Dumas
A sharp fall in global milk production in the second half of 2016 allowed U.S. exports to fill a large supply gap, increasing U.S. exports 25 percent year over year in the second half of 2016 despite a strengthening dollar and strong domestic demand.
But milk production is picking up in other exporting countries, driven by a rally in prices due to the decreasing global export surplus. That rally has run its course, but it set in motion global milk-production recovery against still weak demand, according to Rabobank analysts.
Those factors, as well as several others, could challenge U.S. exports in the future, the analysts stated in their latest dairy quarterly report.
While most of the world’s milk supply contracted in 2016, strong exports and domestic demand, cheap feed and favorable weather pushed U.S. milk production up 1.5 percent. That trend has continued in 2017, with February production up 2.3 percent year over year.
But U.S. consumption growth, which has driven the market since the second half of 2014, might be faltering — with some excess products being pushed into warehouses. A drop in the value of the peso has also reduced U.S. exports to Mexico, the top market for U.S. exports.
But there could be even more trade challenges ahead, the analysts stated.
“The U.S. withdrawal from TPP, which was generally seen as beneficial to the U.S. dairy sector, and talks of NAFTA renegotiations have generated significant unease in the dairy community,” they said.
Of the approximately 15 percent of U.S. dairy production exported, 55 percent goes to partners included in TPP. In terms of NAFTA, 26 percent of U.S. exports go to Mexico and 13 percent to Canada.
Mexico has already sought to differentiate imports away from the U.S., resulting in a 10 percent increase in EU dairy exports to Mexico in the three months to January, the analysts said.
“Risk for the U.S. to lose further share of Mexico and TPP buyers could potentially cause problems for U.S. dairy producers, creating downward pressure on U.S. product prices,” they stated.
Rabobank expects declines in U.S. dairy commodity prices to push many U.S. producers into negative margins, resulting in a slowing of milk production growth – from 1.6 percent in 2016 to just over 1 percent in 2017.
A large gap in available labor supply, if suggested immigration policy changes are executed by the current administration, could further exacerbate challenges on dairy farms, they said.
A modest expansion in U.S. milk supply, together with lower but still relatively strong domestic demand, should render the U.S. with little to no incremental exports through most of 2017, the analysts concluded.