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Dairy Market Update - April 2016

There is nothing exciting happening in dairy today. It remains a buyer’s market and should continue this way for the remainder of the year. The dairy markets are expected to struggle through 2016 with minor positive adjustments later in the year. It appears that the best thing about 2016 is that 2017 is just around the corner!

Variables affecting our markets are:

  • Production
  • World Economies
  • Demand
  • Currency

Production

Production numbers around the world are stronger then we want them to be.
EU production is up over 3%, USA about 2%, China is reported to be about 10% and while New Zealand is down 4% the suggested overall world market is up 2.1%. There is too much milk and not enough demand. Production needs to slow. A combination of falling milk prices and falling beef prices should push US farmers to consider culling herds.

Demand and Economic Growth

Demand for the past year has been sluggish to put it mildly. Without the help of China and Russia we have not been able to absorb the amount of milk being produced. This market today is worse than what we experienced in 2009 when we first felt the weight of recession.

We are all aware that today’s dairy industry was built to accommodate the growth in world demand lead by China, and for nearly a year we have been learning how to get by without China;

What we are finding is that it’s not easy!! World economic growth, or lack of, is not helping our situation. We continue to fight with poor and slowly recovering world economies.

China:

  • China's economic growth forecast continues to drop each year. This year it’s expected to grow at a rate of 6.5% which is down from 6.8% and economists expect this to continue dropping for the next few years until they stabilize at 5%. China continues to struggle through the transition from being an export supported country to a consumer supported country because the consumers are not comfortable spending money in such an unstable environment. While China boasts a 4.1% unemployment rate specialists argue that the real number is more like 14%. China’s government is hoping to create more jobs but businesses are struggling to survive because wages and costs are up while export and consumer sales are down. China relies on Europe for support but Europe is in worse shape than China.

Europe:

  • Europe continues to struggle. The EU is expecting an average of just better than 1% growth this year. Political turmoil, Uncertainty about the future of the Eurozone and unemployment are keeping growth numbers down. Once again the UK is considering separating from the EU and will vote on it in June. Apparently the vote is too close to call in preliminary polls. If they vote to separate it will have a significant impact on the future of the Eurozone and could cause other member countries to question their affiliation.
  • Throughout Europe unemployment remains above 10% at 10.4%. This is down from the 11.2% seen the same time 2015. Still; numbers remain high and recovery is very slow. They are not expecting much change this year.
  • Europe relies on consumer support and export to survive but they are not getting that support. They look to Russia for export and some of the European countries are pushing to lift sanctions before the consideration date of July 31st.

Russia:

  • Russia’s economic growth in 2015 was -3.7%. Russia's economy relies heavily on oil and gas sales. Exports of these commodities form around 40% of Russia’s budget revenue.
  • Recently; in an attempt to change the oil situation, an agreement was reached between Russia, Saudi Arabia and other oil producing nations to cap oil production in order to stop oversupply and end falling prices. This has pushed oil prices higher and will help in the short term.
  • World sanctions are also hurting the Russian economy. Sanctions from the EU and the USA have been extended to July 31st with “Targeted Sanctions” extending another year. Targeted sanctions are those tied to companies and people with direct association to President Putin.
  • There is a push from some European Countries to lift sanctions sooner in hopes of helping grow both economies.

USA:

  • Early forecasts suggested the US would grow at about 2.8% in 2016 but the latest numbers show a slight drop as the economy is slowing again. Current forecasts suggest growth to be between 2.6 - 2.7%. The US is a consumer supported country but has also been relying on exports the past few years as well. Unfortunately; weak economies and a strong dollar were the cause of a 5% drop in overall exports in 2015 while exports of dairy products dropped better than 20%.
  • There are definite signs of strength in certain US markets including construction, home sales, and auto sales. Employment is down around 4.9% which is the lowest in 8 years. The trouble with the unemployment number is that the jobs that were created to help put people back to work, and reduce the unemployment rate, are not jobs that pay well enough to support a consumer supported country. Recovery is expected to continue on a slow and steady path.

Currency and Export

Currency plays a big part in the export market and the US has been hurt by a strong dollar. The U.S. dollar gained 11-15 percent against the currencies of our three main competitors—Australia, the EU and New Zealand. Exports are off better than 20% overall.  While we had a strong January 2016, overall, we fall below 2015 numbers.

Top US export markets most dramatically affected by the strength of the dollar (2015 vs. 2014):

Country

% Up

% Down
Mexico   22
Southeast Asia   35
Canada   6
China   35
S. Korea   27
S. America   4
Japan   33
Mid. East / N. Africa   59
Oceania   27
Caribbean   5

Conclusion

With strong production numbers throughout the world, the challenges of struggling economy’s, a strong US dollar and weather forecasts that favor production numbers it appears the quickest fix to the current market is increased demand. While we will probably see a slowdown in production, the effects of a slowdown won’t be felt until later in the year. For now, inventories will continue to grow. We need Russia and China back in the market.

The feeling is that China will be back sometime after Q2 and before 2017. They are not expected to come back strong but whatever they are able to do will be helpful. Once they return it will still be a while before supply and demand can balance. There is plenty of inventory to go through before a balance can be established.

Regarding Russia; Some European Countries are trying to push for an immediate lift on Russian sanctions’ but that is not likely to happen before July 31st and even then there is no assurance. If Europe and USA are satisfied with a focus on the “targeted sanctions” then it could open the doors for Russian companies that are not associated with President Putin to import. We’ll see!

Current markets:

  • Nonfat is selling in the mid to low $0.70's but inventories are growing and we are expecting a strong Spring Flush. We can expect nonfat numbers to drop more over the next few weeks.
  • Whey is dropping again as inventories rise and is selling between $0.26 and $0.28/LBS
  • MPC 70 is selling around $1.60 but we can expect numbers to be dropping as nonfat drops The higher protein MPC's are not moving much but MPC 85 is around $2.80 and MPI $3.20.
  • IWPC80 is the strongest selling dairy protein and prices have continued to creep upward. IWPC 80 is being offered between $1.85 and $2.10 mostly but we’ve also heard as high as $2.40/LBS.
  • Instant WPI90 has been seen as low as $3.90 but selling mostly between $4.40 and $4.60/LBS.
  • Caseinates are spread between $3.20 - $3.60/LBS.

Please note that the prices quoted in this report are based on Truckload quantities and are FOB the production facilities. LtL numbers are quoted higher and demand premium pricing.

Please feel free to contact us with any feedback, questions or requests.