Don't expect to see the record dairy prices again, but the market could begin to edge up during the second, and especially third quarters of 2016.
Christophe Lafougere presented producers with some of the whys surrounding today's milk prices, explained when recovery should begin and where new growth opportunities lie during the 2016 Great Lakes Regional Dairy Conference in Mt. Pleasant, Mich. last week. Lafougere works for GIRA, a strategic consultancy and market research firm.
"From March 2014 to
August 2015, world milk prices were down 68 percent," Lafougere said, which isn't surprising news to anyone in the dairy industry. What may be unexpected is the combination of forces—three international and one domestic—that together caused the financial landslide.
"Individually none of these reasons can stand alone in causing this kind of price decline, but combined together they can tell us the story," Lafougere said. "They leave a huge imbalance on the demand side."
• Chinese imports interest have dropped by fifty-five percent from January to July of 2015, a loss for exporters of over $2 billion
• The Russian import embargo eliminated around 250,000 ton of mostly European cheese exports, leaving 2 billion liters of milk looking for a home
• The end of the European quota system in April of 2015, causing a 4.3 percent growth in European output in 2013-14 and an additional growth of 1.8 percent in the first ten months of 2015
• The steep rise in the US dollar, causing imports to be more expensive for everyone
So what might happen next? Worldwide milk production is expected to increase by 10 percent between 2015 and 2019. But Lafougere predicts strong future demand for cheese, providing good prospects for both U.S. and the European Union. One key will be in determining what kinds of cheese the consumer desires. Ranked second in cheese imports, Japan will continue to be a strong buyer. Demand for processed cheese in China will continue to grow as one new McDonald's opens every two to three days there and one new Pizza Hut opens daily in the country.
Russian attempts to internally increase cheese production without the benefit of imported fat sources has left the country turning to non-dairy vegetable fats for cheese production. Lafougere does not expect the country's demand for whey products to improve now that alternatives have already been introduced into the manufacturing process, even if the embargo were lifted soon.
China's demand for whey and dried skim milk continues to grow. The Chinese consumer is still distrustful of its domestic manufacturing integrity as a result of the infant formula melamine contamination and continues to prefer U.S. product as the safe alternative. Sixty-three percent of world growth in infant formula consumption will be attributed to China in the next four years. However, China may not be content to import at such a large level and is already looking to establish contracts for manufacturing ownership both in the U.S. and other countries.
Ultra-high temperature pasteurized (UHT) milk demands will continue to develop from China. Their demand for whole milk powder will decline as the product is too fatty for their tastes, but skim milk powder demand will steadily increase.
Increased production caused by the end of a quota system in the EU will not happen all at once and most of the increase is likely to be absorbed within Europe. Technical products such as high protein sports and senior nutrition beverages are developing quickly and there is tremendous demand for service based products in the U.S. and EU.
Domestically, cheese and butter demand are strong, keeping prices up compared to the world supply. Iran and African countries may present new market opportunities.
"The recent price debacle on world markets is probably over for now," Lafougere said. "Its immediate causes have now been digested by world markets. We can probably expect prices to return to their comfort zone relatively soon, before the next inevitable bout of volatility starts up again."