Market Prices React To Tariffs

Vol. 143, No. 1 • Friday, June 22, 2018

USDA estimates May milk production 0.9 percent higher than a year ago. This is a little stronger growth then April which was up just 0.5 percent. Milk cow numbers were 2,000 higher than April, but just 3,000 higher than a year ago. The increase in milk per cow remains well below trend at just 0.7 percent.

Nine of the 23 reporting states had lower milk production than a year ago and two had no change. Ten had fewer cows than a year ago and 10 had lower milk per cow. Two states with the most added cows were Colorado with 16,000 and Texas with 12,000. California had the largest decline in cows with 18,000. States with the largest increase in milk production were Colorado at 11.6 percent, Kansas at 9.7 percent, Texas at 6.6 percent and Utah at 5.2 percent.

Milk production in some of other states was up 0.9 percent in Arizona, 0.5 percent in California, 0.6 percent in Idaho, 1.1 percent in Iowa, 4.0 percent in South Dakota, 2.3 percent in Washington and 1.1 percent in Wisconsin. But, milk production was down 0.3 percent in Michigan, 1.2 percent in New York, 1.8 percent in Ohio and Oregon, 2.1 percent in Pennsylvania and unchanged in both Minnesota and New Mexico.

Positive factors for milk prices were relatively strong domestic sales both at foodservice and retail, increased dairy exports and improved stock levels. On a volume basis dairy exports were at an all-time high during April. April exports compared to a year ago were up 37 percent for nonfat dry milk/skim milk powder, 22 percent for cheese, 190 percent for butterfat, 24 percent for whey products, 23 percent for lactose and 24 percent for milk protein concentrate. On a total solids basis exports were equivalent to 18.8 percent of US milk production.

Butter stocks did increase from March to April and were 5.2 percent higher than a year ago, but American cheese stocks were 2.9 percent lower with total cheese stocks just 3.3 percent higher. Total whey stocks were 19.7 percent lower and nonfat dry stocks just 2.5 percent higher.

But, the market appears to be negatively reacting to US decision to place tariffs on Mexico steel and aluminum and tariffs on a number of China goods and products. In retaliation Mexico announced that they will place a tariff on US cheese and China announced tariffs on some dairy products, corn, soybeans and other products. Mexico is the largest export market for US cheese. In 2017, Mexico accounted for 28.3 percent of US cheese exports.
While these tariffs don’t take effect until July and the degree of impact on US dairy exports is unknown, dairy product prices have already fallen.

On the CME butter averaged $2.3751 per pound in May, was $2.3784 early June but has fallen to $2.31. Cheddar cheese barrels averaged $1.5870 per pound in May, were $1.5983 early June but have fallen to $1.3250. The 40-pound Cheddar blocks averaged $1.6397 per pound in May, were $1.6525 early June but have fallen to $1.5675. Nonfat dry milk averaged $0.8441 per pound in May, were $0.8277 early June but has fallen to $0.7525. Dry whey averaged $0.2981 per pound in May, was above 0.40 in June and has fallen to $0.3950.

Hopefully these declines in dairy product prices are an over-reaction to the imposed tariffs and retaliation. Prior to this it looked like the Class III price would be near $16 by June and move to the high $16’s by October with $17 as a possibility. The Class IV price was forecasted to be in the $15’s by June and the higher $15’s by October and maybe reaching the low $16’s by November.

But dairy futures have tumbled. Class III futures are now in the $15’s July and August, the low $16’s in September to November and back to the high $15s in December. Class IV is in just the high $14’s July and August and the low $15’s for the rest of the year.

Domestic sales are anticipated to stay relatively strong for the remainder of the year. A smaller than earlier forecasted growth in milk production is positive for milk prices.
USDA is now forecasting milk production for the year to be up just 1.2 percent. The unknown is how dairy exports will fare for the remainder of the year. Despite the retaliations by Mexico and China USDA still forecasts dairy exports above year ago levels.

Class III was $15.18 in May and may now improve to around just $15.30 for June. Class IV price was $14.57 in May and may be around $15 for June. From here out prices are uncertain. The price outlook is not as optimistic as a month ago. But, the markets could very well have over-reacted and we could see a good correction. And if the growth in milk production can remain no higher than about 1 percent Class III during the second half of the year could still reach the mid to high $16’s and the Class IV in the mid to high $15’s. BC

Dr. Bob Cropp is the Professor Emeritus at the University of Wisconsin-Madison


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