2018 Dairy Outlook: Feed volumes hinge on trade, consumers

Global dairy producers face several key challenges over the next 12 months, including milk oversupply, a looming trade war and the effects of climate change. In turn, market conditions will impact dairy cattle feed production.

Grigorenko, iStock.com
Grigorenko, iStock.com

Global cow milk production grew by nearly 1.5 percent in 2017; in 2018 and beyond, volumes are forecast to continue to grow year over year. Rabobank predicts the global dairy market will grow by 30 percent over the next few decades, driven by urbanization, population growth and rising incomes.

“Projected growth rates for fresh dairy for the coming decade are higher than those experienced over the past 10 years, driven by increasing per capita demand in developing countries, most notably India,” reports David E. Williams, vice president, Informa Economics IEG. “With the emerging middle class in Asia and the Middle East, demand for dairy will continue to be robust.”

In the short term, dairy producers face a period of volatility and uncertainty, but they also face a future with great opportunity. Feed Strategy’s 2019 Dairy Outlook report aims to identify the macro trends and conditions impacting dairy production — and, in turn, dairy cattle feed volumes — over the next 12 months.

2017 Dairy Market Share Exports By Volume

The regional export market share breakout of dairy products shows the EU-28's hold on cheese and Oceania’s corner on butter and whole milk. | USDA-FAS, CoBank

Age of uncertainty

The success of dairy production has been made possible by a mix of genetics, consolidation and farm management over the past decade, but these gains have resulted in a global milk surplus. In turn, producers have struggled with ultra-tight margins, oversupply and low milk prices.

“Even though there has been a dramatic reduction in the number of farms, the number of cows remains the same and they have been more productive,” says Brian Gould, Renk professor of agribusiness, University of Wisconsin.

Though trade has remained strong across the top three dairy exporting regions (Europe, New Zealand and the U.S.) in recent years, changes to export tariffs initiated by the Trump administration have created uncertainty across the entire dairy industry.

During the remainder of 2018, the National Milk Producers Federation estimates the new tariffs will cost U.S. dairy farmers $1.8 billion.

“Talks of tariffs and trade relationships have introduced a considerable amount of uncertainty in the marketplace, and international prices have fallen,” Williams says. “Volatility will decline through the fourth quarter of 2018 and into the first quarter of 2019 [if tariffs stay the same]; however, with optimism surrounding new European trade deals, as well as a new NAFTA agreement, the dairy complex would react with a more bullish sentiment.”

Rabobank’s global dairy strategist Mary Keough Ledman notes that U.S. milk prices were on a recovery track before “trade dispute rhetoric and Mexican and Chinese retaliatory tariffs on dairy products derailed its rebound by 10 to 15 percent.”

She feels milk and dairy futures may have overreacted but will likely remain unstable until there is a clear direction for dairy exports.

“Mexico has been the largest importer of U.S. cheese and imports to Mexico have steadily grown for several years,” says Williams. “The 25 percent tariff rate has caused a surplus of cheese in the short term. If these tariffs persist, the global dairy market will need to adjust import and export relationships to meet a growing global demand.”

In Gould’s opinion, the trade/tariff situation is the greatest challenge facing U.S. dairy producers – namely the threat of the permanent loss of market share.

Mexico is securing alternate sourcing from South America, which could become a permanent pattern of its importing portfolio. Should the U.S. lose market share in Mexico, its largest dairy export market, Gould feels it could be difficult to find alternative dairy export markets of similar scale. He suggests the U.S. could expand further into Southeast Asia and the Middle East although New Zealand has a strong export profile to these areas.

In response to retaliatory tariffs, the U.S. Department of Agriculture has promised $12 billion in aid under the Commodity Credit Corporation Charter Act, which would include direct payment as well as the purchase and distribution of products.

China’s consumption

According to the U.S. Department of Agriculture’s Foreign Agriculture Service (FAS), Chinese domestic dairy production will increase by nearly 3 percent in 2018, resulting from “long-term investments in genetics and the consolidation and modernization of dairy facilities.” The agency predicts China’s whole milk imports overall will continue to decrease.

Despite the stability and growth of its herd, the Chinese prefer imported dairy products, including fresh milk, cheese and butter. Chinese consumers view these imported products as “more trustworthy and safer,” the FAS reports. However, in the wake of 25 percent tariffs, the U.S. may lose its No. 3 dairy importer.

Alltech’s chief innovation officer Aidan Connolly suggests China may permanently replace its U.S. milk imports with supplies from New Zealand, Australia and Europe.

“There’s a psychological impact [in China] of the current trade situation, a deterioration of the America image,” Connolly says. “The American brand was strong, but it could be permanently damaged by the perception that there’s a war going on. It’s concerning.”

The rise of plant-based dairy alternatives

Though global dairy production is up, consumer expectations and their consumption of dairy products are changing and, in some cases, declining. The primary reason: plant-based dairy product alternatives.

“In the U.S., for example, the per capita consumption of fluid milk beverages decreased by close to 22 percent from 2000 to 2016,” says Ad van Velde, president of Global Dairy Farmers, though making sure to note that liquid dairy products are still being consumed in more than 90 percent of U.S. households. “Through the same period, consumption of non-dairy plant milk alternatives has increased by triple numbers.”

According to a report by SPINS, a provider of retail consumer analytics for natural, organic and specialty industries, the plant-based non-dairy milk market grew by 9 percent in 2016 and is worth roughly $5 billion.

“A growing number of consumers identify themselves as flexitarian, or lessitarian, meaning that they have cut back on their consumption of animal-based foods and beverages,” van Velde says. “These groups of consumers are most responsible for the significant and ongoing shift from dairy milk to plant-based milk.”

Much of the popularity of plant-based alternatives is rooted in the belief that they are “healthier” and “more environmentally friendly” than traditional dairy products; however, some consumers make their choices based on their distaste for “big agriculture.”

“There is a growing consumer base that is motivated by animal welfare concerns, leading them to choose plant-based beverages, as well as other plant-based foods over animal-based products,” van Velde says. 

Serving this niche, the global certified organic milk industry has grown by 1.9 percent between 2012 and 2017, with a value totaling $4.3 billion. Organic milk production accounts for less than 1 percent of total world dairy milk volume – almost 8 billion liters in 2017. While these producers can charge a premium (9 to 50 percent more than conventional milk depending on the region), it can cost up to 1.6 times as much to produce, reports KPMG International.

Despite its virtues, the organic milk and dairy products sector is not immune from the threat of losing market share to the plant-based alternative category, which continues to innovate with a wider range of raw materials, e.g. peas, hemp and grains, such as quinoa and barley.

2017 Feed Production By Species

In 2017, complete dairy cattle feed production accounted for 22.5 percent of total global compound feed production. | WATT Global Media

Mouths to feed: Weather extremes impact feedstocks, feed production

The world’s dairy cattle herd is growing, but expansions vary from region to region, and some are decreasing or flat. In addition to the mouths to feed, commodity prices and supply will affect dairy feed production over the next 12 months.

According to the WATT Global Media’s World Feed Panorama report, complete dairy feed production accounted for 22.5 percent of total global compound feed production in 2017.

Due to inclement weather events through the spring and summer, dairy cattle feed production is expected to increase in 2018.

Weather extremes in Europe and New Zealand have impacted the quantity and quality of the corn and grass silage, hay and feedstocks. Dairy and feed producers will be dealing with higher incidents of mycotoxins, though the extent of which remains unknown.

New Zealand had bad weather in the spring; and European dairy producers are currently facing a severe drought and record-high temperatures across much of the continent,” Ledman says. “U.S. dairy producers have also faced some weather-related problems that have contributed to rising alfalfa prices. USDA reports the average alfalfa price $181/ton in June 2018, up 18 percent from last year.”

Connolly, who believes dairy feed production will be flat for the next three to four years, predicts feed volumes may turn upwards this year.

“Based on milk prices, I would have thought global dairy feed production would be down, but due to droughts in certain markets, we may find more countries feeding above-average feed and producing more,” Connolly says, while also noting the strain this will place on producer profitability.

Informa Economic IEG’s Williams feels drastic shifts in soybean prices will also have implications on feed cost margins through the end of the year.

Fernando Soberon, Trouw’s national tech transfer manager, believes alternative feeds, such as forage extenders or byproducts, may fill the gap as dairy farmers adapt their diets to accommodate availability of new ingredients.

In conclusion, dairy feed production worldwide may rise in 2018, but is expected to stay flat in 2019.

References available upon request.

2018 Worlds Top 20 Dairy Companies

Turnover among the top 20 dairy companies was up 7.2 percent in 2017, Rabobank reports. Consolidation continues to be a pervasive trend among the world’s top dairy companies. | Rabobank

 

Market update: New Zealand*
New Zealand produces about 3 percent of the global milk production, but it is the world’s largest exporter of whole milk powder and butter fat. Just ahead of the 2018-19 New Zealand milk production season, government officials announced a phased eradication of bacterium Mycoplasma bovis. The mandatory cull represents about 10 percent of New Zealand’s annual dairy slaughter. However, supply-side challenges are expected to temper year-over-year growth in global milk production and be supportive of farm-level milk prices. Its 2018-19 milk production season is expected to be another season of profitability, spurring a 2 percent increase in milk production.

Market update: United States*
The U.S. represents almost 20 percent of global milk production. According to USDA’s Margin Protection Plan (MPP) for Dairy calculation, farm-level margins have shrunk by $2.63, or 27 percent, compared with 2017. Two-thirds of the margin compression is due to lower milk prices with higher feeds representing one-third of the margin erosion. U.S. dairy cow slaughter to date has totaled 1.5 million head, up nearly 5 percent from last year. The U.S. dairy herd stood at 9.4 million head midyear, unchanged from 2017, and signals a respite from growth in U.S. milk production driven by increased herd size. Year-over-year 2018 production gains will depend on greater output per cow.

Market update: European Union*
The EU-28 member states, which account for nearly 30 percent of global milk production, expect year-over-year milk output to increase by less than 0.7 percent, RaboResearch reports. EU-28 milk prices are forecast to increase in the latter half of 2018, returning to levels closer to EUR36 cents/liter. The price boost, however, might not be enough to cover higher feed costs.

*Market updates provided by Mary Keough Ledman, global strategist – dairy, Rabobank

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