Record milk prices seen in 2022 likely won’t repeat themselves, as production increases and consumers grapple with an economic slowdown, according to members of the NMPF and U.S.
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Falling Prices, Rising Opportunities on Tap for 2023

Dairy Export Council’s joint economics unit, in a Dairy Defined Podcast released today. But exports are on track to increase, and demand will likely be resilient as dairy remains must-have for buyers.

“Consumers around the world still gravitate towards dairy, even when they’re experiencing tighter economic situations,” said Will Loux, head of the team Vice President for Global Economic Affairs with NMPF and USDEC. “They ultimately view dairy as an essential item and will continue to consume it.”

Loux discusses the global and domestic dairy outlook with NMPF’s Chief Economist, Peter Vitaliano; Economic Research and Analysis Director, Stephen Cain; and the joint economic team’s newest member, Economic Policy and Global Analysis Coordinator, Allison Wilton. The full podcast is here. You can also find the podcast on Apple Podcasts, Spotify and Google Podcasts. Broadcast outlets may use the MP3 file below. Please attribute information to NMPF.

TRANSCRIPT

Alan Bjerga, NMPF: Hello and welcome to Dairy Defined. 2022 shaped up as a memorable year for the dairy economy with record milk prices and exports, even as farmer costs also reached new highs. But what does this year have in store? Joining us today is the full economics team, and we mean team. Created last year jointly by NNPF and the US Dairy Export Council. It’s led by Will Loux, Vice President for Global Economic Affairs with NMPF and USDEC, along with NMPF Chief Economist, Peter Vitaliano, Economic Research and Analysis Director, Stephen Cain and the team’s newest member, Economic Policy and Global Analysis Coordinator, Allison Wilton. I’d like to start with you Will. Heading into 2023, what does the global economy look like, and where does US dairy fit into it?

Will Loux, NMPF: We’re still in for plenty of uncertainty around the world. I think that’s going to be the buzzword again. Obviously last year was all about inflation. Inflation isn’t going away in 2023. What we expect to see is perhaps not as high of inflation as we saw this past year, but it’s still, if you take out 2022, probably going to be the highest this century anyway, so it’s still going to squeeze consumers’ pocketbooks. I think you’ve also got central banks around the world, including the US’s Federal Reserve, raising interest rates, trying to slow down inflation, but in doing so, slowing down the US economy and the global economy and all of that really hurts consumers pocketbooks and checkbooks.

And what that means ultimately for dairy is that we expect to see a little bit slower consumer demand. But ultimately I think what we want to focus on here is the fact that consumers around the world still gravitate towards dairy, even when they’re experiencing tighter economic situation. They ultimately view dairy as an essential item and will continue to consume it, but likely they’re going to trade down the value chain. Think less of your nice specialty cheeses, probably a bit more of your staples like cheddar and mozzarella and the like.

Alan Bjerga, NMPF: In this case, the in inelasticity of demand for dairy becomes the industry’s friend.

Will Loux, NMPF: Exactly. That’s right. Ultimately what we expect is consumers, they’re still going to eat dairy really around the world, not just in the United States, but everywhere. But perhaps they’re going to be looking for value where they can find it, finding deals, if anything’s on sale, they might be gravitating more towards that. But ultimately we expect consumers to continue gravitating towards those dairy product staples that they know and love.

Alan Bjerga, NMPF: And this is really a global phenomenon. This isn’t just what US consumers are going to be doing. This will affect export markets as well.

Will Loux, NMPF: That’s correct.

Alan Bjerga, NMPF: And exports, great story for US dairy, taking up a greater share of milk, helping balance supply and demand. Stephen Cain, you’ve been watching this growth pretty closely. Could you drill down into some specific markets where US dairy has some opportunities to grow in the next year?

Stephen Cain, NMPF: Yeah, first just touching a little bit on where we came from last year. Global trade dairy products last year overall was down 4%, but the US during that same timeframe, was up 4%. It’s a really great testament to the US resiliency in the export market when it’s in a tough climate, but also just that we have great products and folks around the world are wanting them. And so for 2023, so what are we expecting? We’re expecting to see some continued growth like we saw this year, or where are we headed? First touch a little bit on Mexico, our big southern neighbor there to the south. It’s a major export destination for US dairy products. Mexico was hit pretty hard with economic impacts of COVID and really over the last few years they’ve been working their way back gradually to trend. And I think we’re going to see that continue to happen, especially nonfat dry milk and cheese.

We’ve seen some pretty strong growth over the last 18 months or so for both of those products and the US, we’ve got a market share dominance in the region. Whenever demand increases in Mexico, that is a direct benefit for US dairy exporters. Non-fat, a little bit flat here over the last 18 months, but we’ve seen some more resurgence here over the last few months, which is really bullish, exciting, therefore exports going into Mexico for that product. Cheese though has really been on a tear for growth over the last couple years, up 40% from where they started in 2021. And again, US dominant market shareholder there, so any major growth coming out of cheese in Mexico, direct benefit to us. I don’t think we’re going to stay necessarily on that same dramatic growth increase, but I think we’ll continue to see some strong demand for cheese coming into Mexico in 2023.

Southeast Asia, this is a little bit different of a story. I’m not expecting to see a huge amount of growth here in 2023 for US exports to the region. We saw some dramatic growth a couple years ago and we claimed a lot of market share dominance in the region. For 2023, I still expected to see some incremental growth where we can get it. But I think the biggest story for Southeast Asia for US exports is maintaining that market share that we’ve clawed away from our competitors and really growing where we can, but maybe not as dramatic of a growth as we saw a couple years ago.

Alan Bjerga, NMPF: And these are all very positive stories for US dairy producers, you now see one out of every six gallons of US milk somehow making their way to an overseas market. Of course that still means five out of every six are being consumed domestically, which is pretty dominant. And I want to turn a little bit to the domestic front, Peter. The bulk of US milk is still tied to the domestic market. What trends are we seeing in these areas, and how do you see farmers responding?

Peter Vitaliano, NMPF: Well, one of the dominant trends is milk production is increasing at the moment. Normally that’s a dog bites man story. But what’s unusual is that just a few months ago, we came out of one of the longest ever periods in which US milk production in total, was down below its level a year earlier. And that tightening of milk production is what gave us in many ways, the unusual circumstances we saw in 2022. For example, milk prices in the country are going to average about $25 and 50 cents, a hundred weight, that’s a $1.50 higher than the previous all-time average of $24, a hundred weight, that was set back in 2014. What that means unfortunately, costs of producing milk were at record levels and took a lot of that high price away from dairy farmers in terms of margin. But enough producers then have been able to weather that storm and are now finding it advantageous to take advantage of at least the last portion of those relatively high milk prices and expand production.

US production is increasing, and the big question is how fast and how much it’s going to be going up this year, and what’s going to be happening to costs? The current futures are indicating we’re looking at about a $3.50 lower average price in 2023 than last year. I think it may be a little bit more than that. The current indications are the costs are not going to come down quite as much, although they will be coming down. The key question is when and if to what extent the cost price squeeze affects dairy farmers of milk production.

In terms of domestic consumption, that had been down for a good part of the last year, but overall consumption of milk and dairy products has been increasing in the domestic market. It is not increasing on a percentage basis as fast as exports, but I think on an absolute basis, I think the current situation is such that the actual volume of increased milk consumption in the domestic market, even though it’s five times as big, is about the same as the increased consumption in the last couple of years in the domestic market.

In a sense, both markets are doing their part to increase consumption. The eternal question is always, will milk production keep pace with that increased demand, or will it outrace it as it tends to do? And that has a big effect on prices. Right now, it looks like it’s going to be a reasonably decent year, although margins will be tight for dairy producers. We’ll hope that the export market continues to give the superior performance and the domestic market sort of goes along at its usual rate of keeping up with population growth and some additional continued gains in the consumption per capita.

Alan Bjerga, NMPF: Turning to Allison, newest member of the team, welcome Allison.

Allison Wilton, NMPF: Thank you.

Alan Bjerga, NMPF: A fun fact about Allison is she continues to be actively engaged in farming. When you go back to your family ranch in New Mexico, helping out with what needs to be done and keeping in touch, frankly with producers community in agriculture, what should a dairy farmer be keeping in mind when they’re looking at the dairy economy that Peter’s describing and figuring out what to do?

Allison Wilton, NMPF: I come from a beef cattle ranch, so there’s a little bit of difference, but there’s still a lot of carryover. I think looking as they weigh their prices and their costs, as Peter was talking about, I think they need to keep in mind some risk management strategies to protect their margins and protect their incomes. There’s several strategies that they can utilize, such as using the futures market to hedge their input prices. There’s programs such as the dairy margin coverage, DMC and livestock gross margin, LGM for dairy, that they can protect their margins against rising feed costs or if the milk prices fall, it protects against that as well. And then there’s also the Dairy Revenue Protection Program that helps to ensure against unexpected revenue declines. There’s a few ways that farmers can prepare for the upcoming year, regardless of what it holds and to protect against any unforeseen circumstances as they move into the year and moving on.

Alan Bjerga, NMPF: Thank you, Allison. And thanks to everyone on this team for insight. And while we’re here, let’s talk about the team a little bit. Will, this is a new entity we have here. When I came to NMPF just four short years ago, the economic staff for NMPF was basically an army of one, a formidable army, but still an army of one. And now we have this whole group of people here being able to give economic insight and analysis. Tell us about what’s been developing in the economics front in dairy these days.

Will Loux, NMPF: Yeah, happy to. I joined just about four years ago as well, Alan, on the US Dairy Export Council side, but I always had an office right next to Peter’s, so I’ve been able to bug him for the past four years, and now we are going to make it official that now I can bug him on all kinds of issues, whether domestic or international. But a big part of this is increasing that collaboration between the US Dairy Export Council and National Milk to make our member and farmer dollars go farther. It allows us to have complimentary skillsets and expertise areas, whether that’s Peter’s knowledge of the domestic front or my knowledge of the export council front, or Stephen being our Swiss Army knife, or Allison knowing the farm side as well as helping keep all the trains running on time. This team is really about building out our skillset, our knowledge, and what we can do for our members and farmers.

Alan Bjerga, NMPF: And when did you officially unveil this team?

Will Loux, NMPF: We officially joined and unveiled it at the NMPF DMI annual meeting this past October.

Alan Bjerga, NMPF: And since we have you all in one spot, I want to try something that we don’t usually do here, but it might be of value to our audience. We’re going to do a lightning round. I know economists hate making prognostications, but that’s also what a lot of listeners come for, so I’m hoping you can do your best. We’re going to throw a few topics at you, just some quick takes about what we might see in 2023. Dairy prices in 2023, up, down?

Peter Vitaliano, NMPF: Down, as I mentioned.

Will Loux, NMPF: I’m with Peter, down, at least in the first half, and then a recovery in the second.

Alan Bjerga, NMPF: How about production?

Stephen Cain, NMPF: Up.

Alan Bjerga, NMPF: Stephen, you want to elaborate?

Stephen Cain, NMPF: Yeah, well just by pure math numbers, I think we’re necessarily going to be up for sure in Q1 and into Q2, just on pure cow numbers alone. In November production numbers, we have 38,000 head more in November than we did in November of 2021. And as move into 2023, that gap is going to persist. Just on cow numbers alone, I think we’re going to be up. But then as moving into back half of the year, again, I think we will just continue to see some increase in productivity and with those higher cow numbers, I think overall we’re going to see milk production be up in 2023.

Alan Bjerga, NMPF: Okay.

Will Loux, NMPF: And it’s worth noting we almost always have productivity growth from dairy farmers who continue to get more and more efficient. We always see games in pretty much every month of liquid milk per cow, as well as the components in each hundred way to milk.

Alan Bjerga, NMPF: Turning to exports, we’ve had a couple record years coming here. Are we going to see another record in 2023? Value, volume, yes, no, and why?

Will Loux, NMPF: I’ll say yes, and I’ll go on the record for this one, so y’all can call me out on it if we end up being wrong. But we’ve had three straight years of records for volume. We’ve had two straight years of records for value. I think we will get another record year for volume, especially if we see that milk production growth that we’re expecting, as well as we continue to see demand growth overseas. The big question to me is if prices do dip, then we may not see the same growth in value this year and that record may be harder to sustain. But overall, I think we’ll see a good record year for volume.

Alan Bjerga, NMPF: Finally, some best case and worst case scenarios. What factors could make this a better year for dairy farmers than expected, and what could be something that could actually make it a little tougher than we’re thinking right now?

Peter Vitaliano, NMPF: I’d say the biggest variable right now in terms of toughness for dairy farmers, which means milk prices and margins, would be the rate at which milk production expands, this year, because it’s a commodity industry and supply and demand set the price. It is, as Allison mentioned, there are risk management options dairy farmers can take. And when prices are coming down, it’s not a bad time to do that because the futures markets tend to be conservative. They tend to forecast about where things were over the last several months and we’re, the last several months, have been very high prices, so the futures markets reflect that. Locking in those prices may actually prove advantageous compared to where prices actually move as we go forward throughout the year.

Will Loux, NMPF: I’ll agree with Peter on supply, but I actually might take not so much what US dairy farmers do, but what farmers around the world are doing in terms of milk production growth. These past two years, we’ve seen really weak milk production, particularly out of New Zealand as well as the European Union, although Europe’s milk production has started to come on a little bit stronger as of late, but I think that’s going to play a major role overall in that big global supply and demand. But I do think demand is going to matter a whole lot, especially given the economic headwinds that we’re facing, as I mentioned at the top of the show.

Stephen Cain, NMPF: I think China is going to be a big, big toss up here in 2023 for global demand. They’re pushing 30% of all globally traded dairy products. They’ve been down significantly over the last 18 months. Moving into 2023, I think if you had asked me a month ago what I thought Chinese demand was going to look like in 2023, I’d say probably a little iffy, but I’m a little more bullish now that they’ve started to relax some COVID restrictions, let folks quarantine at home, relax some of the movements throughout the country. I think that’s all bullish for dairy demand. I think we’ll see a lag before we see some really increased exports to the country as the service sector ramps back up. But I think that’s going to be a big piece as well for global trade is whether or not, or how strong China comes back in 2023.

Allison Wilton, NMPF: Risk management, it’s going to help against anything that comes in the works. If it’s an unexpected black swan event, we’ve had a lot of those over the past three years. It’ll help too, especially since we’ve had those historical high prices, and the futures market is, as Peter said, very conservative. A lot of these programs are based on the futures market and help to protect those margins. If there is something unexpected that happens, farmers have something to fall back on, have an insurance or a program that has their backs in those situations. That is definitely something that a lot of farmers need to look at when looking at their bottom line going forward, is to consider those programs as part of their management strategies moving forward.

Alan Bjerga, NMPF: Any final thoughts?

Peter Vitaliano, NMPF: I would just say I wouldn’t fully agree that economists don’t like to prognosticate, it’s part of their job. They’re good at hedging and making sure they’re not held fully accountable, but they will make predictions freely.

Allison Wilton, NMPF: I like to say an economist’s favorite answer is, it depends.

Alan Bjerga, NMPF: You’ve been listening to NMPF and USDEC Economics Unit, Will Loux, Peter Vitaliano, Stephen Cain and Allison Wilton. Thank you so much for joining us today.

Will Loux, NMPF: Thanks, Alan.

Alan Bjerga, NMPF: And that’s it for today’s podcast. For more of the team’s work, you can go to the US Dairy Export Council’s website, U-S-D-E-C, USDEC.org, where you can see many recent publications including last week’s trade data summary. And you can subscribe to NMPF’S Monthly Dairy Market report written by Peter Vitaliano at nmpf.org/subscribe. And for more of the Dairy Defined Podcast, you can find and subscribe to the podcast on Apple Podcasts, Spotify, Google Podcasts, and Amazon Music under the podcast name Dairy Defined. Till next time.

UK stocks slipped on Monday as investors refrained from making risky bets ahead of key central bank decisions this week, while gains in Unilever limited losses on the FTSE 100 after the consumer goods giant announced a new chief executive officer.

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