WASHINGTON, April 20, 2016 - So far, the U.S. dairy sector is swimming along fairly well through a flooded world market.

American dairy farmers have a mixed bag economically this year, starting with a national producer milk price of $15.70 per hundredweight (cwt), its lowest in nearly six years. Thus, many small or less efficient dairy farmers, who saw prices over $20/cwt in most of the past three years, are losing money. What’s more, USDA this week projected the all-milk price will linger around $15 through 2016, with manufacturing grades at $13 to $14.

U.S. milk producers are increasingly dependent on sales abroad, and Bob Yonkers, chief economist for the International Dairy Foods Association, points to three factors in the world arena “that have really kind of put us into this lower price environment.” He pointed to the European Union’s final phase-out of its milk production quotas and its farmers’ surge in output, the trade sanctions that led to Russia’s suspension of dairy imports from Europe, and China’s reduced pace of dairy imports stemming from its economic slowdown.

The result is such an abundance of dairy products that the United Nations’ Food and Agriculture Organization’s dairy prices index has plunged to its lowest since June 2009, owing mostly to low butter and cheese prices. So despite the U.S. dollar’s strong exchange rate, which makes American products more expensive abroad, softer prices enhance sales volume, and the recent years’ huge run-up in dairy exports has slowed only modestly overall (see graph). U.S. non-fat dry milk exports, now going for a very cheap 74 cents a pound or so, broke a record in 2015 and were up 14 percent in January and February, compared with the same months in 2015. The downturn, meanwhile, is most acute for butter, which goes for about $1.20 a pound on the world market, or at least 80 cents less than U.S. wholesale prices. With such a disparity, U.S. shipments abroad fell 70 percent in 2015 versus 2014, and 44 percent in the first two months of 2016 versus that period in 2015. Meanwhile, U.S. butter and butterfat imports, though still a small slice of this country’s consumption, have soared.

Nonetheless, higher milk output and rising dairy inventories aren’t killing U.S. markets so far. The latest stocks report, for February, showed butter supplies up 32 percent from a year earlier, and cheese inventories up 11 percent. The current $2.05 a pound for butter remains unusually high, and cheddar cheese blocks at about $1.43 are low but fairly normal in the springtime market.

Says Yonkers: “I’m still kind of wondering why our domestic prices are staying up as high as they are,” despite the butter stocks buildup and surging imports, though he expects a lot of buyers who couldn’t build up their stocks from the seasonally brisk fall markets in recent years (because prices stayed high) may be filling their autumn needs early this year.

John Newton, economist for the National Milk Producers Federation (NMPF), takes a similar view. The U.S. dairy sector has often operated well with relatively ample stocks of products, he said. “On the butter side, inventory levels are high, but we’re going into ice cream season,” and milk fat is marketed in Greek yogurt, as are whole milk and cheeses. “So there is still ample demand for milk fat going forward,” he said.

In fact, said Jerry Cessna, dairy economist and forecaster for USDA’s Economic Research Service, Americans’ growing demand for those high-milk-fat products is a big reason that 2016 will manage to be a steady year for the U.S. dairy sector, using up the added domestic and imported milk products. Cessna projects total commercial use of milk for 2016, measured on a milk-fat basis, will jump 4 percent over 2015, and year-end commercial stocks will sink below year-earlier volumes.

Cessna says farmers continue to increase milk output modestly, despite their shrinking milk checks, largely because of low feed prices, compared with the grain and forage costs of recent years. Besides, he points out that prices for culled dairy cows are very low, persuading farmers to retain the cows longer, which adds to milk output. “With the input prices being so low and cow slaughter prices so low, that mitigates some of the pressure to reduce the milk supply,” he says.

Meanwhile, few farmers have cashed in so far on USDA’s Dairy Margin Protection Program, now in its second year, which allows a producer to ensure a minimum spread between cow feed costs and the price of milk. For a nominal fee, USDA gives enrollees insurance that pays off if the spread falls to under $4 per hundredweight of milk, and they can buy a margin of protection of up to $8 spread by paying premium rates. But so far, the actual margin scored by USDA has remained greater than $7.50 most of the time, thus paying few indemnities.

Jaime Castaneda, NMPF senior vice president, says the program is working well since it was designed as insurance against heavy losses. “It was created to save the farm, not enhance income,” he said. “This is not a big consolation while we have low milk prices,” he said, but, except for Canada, with its supply management program, “we actually have better prices than anybody else. Our farms… are certainly doing better than most farms in the big exporting countries of New Zealand, Australia, Latin America and, obviously, Europe.”

Rob Vandenheuvel, general manager of the California-based Milk Producers Council, points out that a change USDA announced in MPP this month is a significant help to the typically large dairy farms in his state. Up to now, farmers had to choose the same level of coverage for all milk that they insured, up to 90 percent of their production. Now, all farmers can enroll 90 percent of production at the almost-free $4 margin coverage, and then purchase higher coverage on just the share of that they want to cover at a higher level, he said. That will make MPP much more useful for farmers protecting their farms, he said.


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