Analyst: Dairy Outlook Requires Big Picture’ Approach

1/12/2013 7:00 AM
By Maegan Crandall Central N.Y. Correspondent

ITHACA, N.Y. — Farmers and agricultural representatives once again attended the annual Agribusiness Economic Outlook Conference at Cornell University last month, eager to gain a greater understanding about the short- and long-term outlook for agriculture and agricultural products.

Several sessions were held throughout the day concentrating on grains and feed and horticultural products.

Mark Stephenson, director of dairy policy analysis at University of Wisconsin-Madison, once again addressed the outlook for dairy.

Several factors relating to dairy policy and outlook need to be examined in order to fully understand the “big picture,” Stephenson said, including weather patterns, the value of the dairy ration, dairy consumption demand, dairy exports and the Farm Bill.

“We’ve always had data that we look at and data can be interesting in-and-of-itself, but usually what data does when we’re looking at this and putting pieces together is tells the story you have every year,” he said. “So the dairy outlook isn’t all about data; it’s how the data comes together to tell the story of what has happened in the years past and the way that it influences what is likely to happen this year.”

Global weather patterns have shaped dairy outlook significantly over the past year — with wide-spread drought — and Stephenson said this factor alone will continue to be a strong indicator of outlook and policy.

“The southern oscillation gives rise to the El Niño and the La Niña events. These are large weather-based patterns or phenomenon that happen as a result of this southern oscillation,” he said. “Under one of these La Niña patterns that we are having, we have strong western trade winds. A La Niña pattern will typically give us warmer and drier weather patterns than we would normally have and what it tends to also do is force these storm systems to be in the Oceana area.”

Stephenson said La Niña has caused a widespread drought in the U.S. and bountiful rains in New Zealand. As a result, he said, U.S. milk production has begun declining and New Zealand’s milk production is growing.

“That’s just the nature of the beast right now where we are,” he said.

This year, climatologists are fairly uncertain with their predictions — a possible El Niño pattern, a “normal” year, or perhaps the lingering effects of La Niña, Stephenson said.

“The El Niño pattern is precisely the opposite where we get a warmer body of water in the Equatorial Pacific region and this warmer body of water generally gives us the rain,” he said. “Climatologists are hedging their bets this next year and we aren’t entirely sure what might happen. We might have a normal year where we don’t have anything or might have some of the effects of the La Niña.”

The demand for dairy products also points to possible trends and shapes future dairy policy.

“Fluid milk sales have been in the news in the last few months and I would contend it’s not because of this really big strong trend that we’ve had that’s negative — although that’s the real thing — it’s because we’ve hit a milestone,” he said. “We have for the first time dropped to a point where our per capita consumption of fluid milk in this country is just below 20 gallons — so this is a nice round number and it’s something that says this is a bad thing. This is not a trend that a dairy industry would want to have.”

However, Stephenson said, the greater dairy industry shouldn’t worry about it.

“This is a business model that is changing now and in fact needs to change,” he said.

Instead, Stephenson suggested looking at the per capita consumption of all dairy products, because it’s a better story to tell. It points to an increasing trend overall. Much of this long drive up has been on the back of cheese, but there are new products as well, like yogurt.

“We’re pretty enthusiastic about consumption patterns we’ve seen in other products,” he said. “With regard to the fluid consumption, in some sense we are going to have to get over it. We simply need to find different ways to deliver it. If we can’t deliver it in a traditional sense, then we need to find new ways to sell it.”

Exports of dairy products are another huge factor affecting dairy outlook.

Stephenson said export sales of dairy products blossomed in 2007 but didn’t last long because of the global recession in 2009.

“That also didn’t last very long and we have increased exports very considerably — 13.5 percent of milk solids produced in this country are being exported this year. It’s a big increase. It also means we have a different dairy environment that we live and work in, and we have to now consider what is happening in the rest of the world and not just to us — what happens overseas matters,” Stephenson said. “Anytime Oceana has a really good year, we have trouble exporting as much; it’s countercyclical.”

Stephenson said dairy stock numbers need to be carefully considered in terms of the new global market.

“The stocks are at a pretty normal level for us. Cheese stocks are at a fairly low level for this time of year — modestly tight stocks. Nonfat dry milk — we exported a lot — are also tight again. Stocks are really a type of canary in a coal mine, if you will. It tells us how we are doing,” he said. “U.S. prices are typically selling at a discount to Oceana prices. But recently our domestic prices have been above the high level of Oceana prices. So, while our stock numbers tell us the milk prices should be stronger today, as long as we are involved in a world market we can’t diverge from that.

“You have to take a look at U.S. prices relative to world prices, because if that’s out of alignment — even if everything else tells you that prices ought to be going another direction -— they may not,” he said.

Stephenson said he believes U.S. “prices don’t have much further to fall and that more than likely the world prices will come up.

“My forecast for prices in 2013 is I have the New York average milk price up almost $1.50 per hundredweight for the year,” he said. “My projections are actually quite flat yet I’m more optimistic than the future market.

“If I have an error in forecasting, my projections are likely to be too low. The most opportunity for deviation would likely take place in the second half of 2013 where the milk prices could rebound quite strongly,” Stephenson said. “A lot of it is going to depend on what happens out here with drought.”

Additionally, Stephenson forecasted the futures market for soybean meal will decline over the course of the year, and corn prices will drop a dollar a bushel by next harvest season.

“I think the next year’s weather with soil and moisture is real uncertain and climatologists are hedging on what is normal but leaning toward a persistent drought through (the) year,” he said.

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