Brightening Prospects for US Milk Production Margins Amidst Dairy Market Insights -

StoneX Financial’s Webinar Highlights Dairy Market Trends and Expectations

In a recent webinar exploring the global dairy market outlook, Nate Donnay, an expert from StoneX Financial, Inc., offered valuable insights into the anticipated trajectory of US milk production margins, which have faced challenges due to fluctuating cheese prices.

Donnay pointed out that US milk production margins had experienced a significant dip, reaching what he termed ‘painful levels’ for farmers. This decline in margins was largely attributed to a drop in cheese prices, which had fallen below $3,000 per ton during July. The ripple effects of this plummet in commodity prices were felt directly on the farm level, causing a decrease in milk prices. Notably, feed costs remained relatively stable, further straining the margins.

us-milk-production-growth — Source: StoneX

The dip in margins during July marked the culmination of a six-to-eight-month period of declining trends. However, Donnay offered a glimmer of hope, stating that the situation is anticipated to improve with a rebound in cheese prices during July and August.

Although these improvements are expected to provide some relief for US farmers, the forecast predicts a mild discomfort level for the first quarter of the upcoming year. This projection will likely drive a steady reduction in the size of the US dairy herd. Presently, the US dairy herd has already diminished by 36,000 head from its peak, with Donnay anticipating a gradual decline of around 8,000 cows per month until mid-2024. This timeline could potentially result in a contraction of the herd by approximately 125,000 cows.

Donnay also delved into the expectations for production per cow, emphasizing that recent trends had shown a weakness in production. Despite some challenges, he suggested that long-term production per cow growth could reach around 1.1% to 1.2%, eventually contributing to the overall growth of approximately 2% in 2024.

Discussing the broader dairy market, Donnay highlighted the rally that the US dairy market had experienced over the past year, largely driven by cheese. He noted that while there is optimism for growth through 2024, there’s a need to acknowledge the possibility of production levels approaching those of the previous year in early 2024.

Image: StoneX

Europe in bearish territory

Looking beyond the US, John Lancaster, Head of EU Dairy Consulting at StoneX Financial Europe S.A., shed light on Europe’s dairy landscape. He outlined how volatility in inputs, including feed costs, could impact the industry. He also explored factors affecting competitiveness, including exchange rates, and discussed milk production trends in Europe, comparing them to those of the UK.

Elsewhere in the world, there’s been weakness out of Oceania, particularly for New Zealand whole milk powder, while Europe has remained relatively flat.

John Lancaster, head of EU dairy consulting at StoneX Financial Europe S.A., said that some level of volatility is still expected on the inputs side going forward, even if the last couple of months have seen continued pull-back on feed costs. “Versus some of the more average levels, we are still relatively high,” he said,” [but] we are in a much better situation to six months or a year ago.” However, with tensions rising in the Black Sea and Russia refusing to back the grain deal, corn and wheat prices could be at increased risk.

Fuel prices have also rebounded in the last month and a half reaching relatively high levels again, he explained. Possible strike action in Australia, a major exporter of liquified natural gas, stoked fears over global LNG availability and caused European prices to trend up for several days, easing back again last Friday. European gas is expected to trade around €45-€50/$49-$54 over the winter, putting European processors at a disadvantage compared to their US counterparts.

Image: StoneX

Europe’s competitiveness has also been hurt due to exchange levels that are getting close to parity. “We started the year close to parity; we are moving around the 1.10, 1.11 level [for €1] for the last month or so [on August 15, 2023, the rate stands at 1.09 USD, down from 1.12 on July 15, ed.]. That has also reduced the competitiveness of European products and made US products more competitive. That looks like it’s going to hold up at these levels,” Lancaster said.

He added that margins have dropped off from a farmer’s perspective but look better than in the US. “From a margin-over-feed point of view, we’re looking pretty good right now,” he added, “especially when we compare the US margins.”

But the cost of production varies greatly in Europe, he added, with grass-fed systems such as the Irish in the mid-€30s while more intensive farming is likely to stand around low to mid-€40s/$49.

On volume, European Union countries and the UK are running positive YOY for milk production. “The expectation is that these YOY gains will finish as we go into September and October,” said Lancaster. “The impact of lower milk prices and lower margins on European farmers and also the YOY comparisons getting more difficult with the strong milk production that we had in fall 2022 due to favourable weather conditions and excellent pasture growth combined with very high milk prices incentivizing farmers.”

Image: StoneX

Volume has been holding ‘relatively well’ this summer but the expectation is to move into negative territory over the fall and be down YOY in Q2 2024.

Europe has also been more stable than the US from a product point of view, even if cheaper US prices at the start of the summer had made the export market more competitive – but in the last two weeks, ‘we’ve seen more downward pressure on prices, particularly skim milk powder’, said the analyst. There’s more downward pressure on cheese too, which was trading at €50-75 ($54-$82) per ton. “Forward curves on the cheese are generally flatter than what we are seeing on butter, powder, or whey, and buyers and sellers are putting the same level of premium into next year,” Lancaster concluded.

In conclusion, StoneX Financial’s webinar provided a comprehensive overview of the dairy market’s recent trends, challenges, and potential areas of growth, offering industry stakeholders valuable insights to navigate these dynamic dynamics.

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