Monday, 07 November 2016 13:48

Who’s afraid of the USA?

Written by  Jo Bills, Fresh Agenda
Mark Goebel via Flickr Mark Goebel via Flickr

FOR most of the past year, dairy market watchers, including us, have been focussed on the EU and to a lesser extent New Zealand.

Their long-awaited supply response has been the key driver of improvements in commodity prices of late, and further developments in those regions will figure significantly in re-balancing global supply and demand. 

Amid all this drama the US dairy industry has pretty much been chugging away in the background, in it’s own little supply and demand bubble, without a great deal of involvement in global market shenanigans.  

But is that about to change? 

The US is the only major dairying region that is still in expansion mode, as healthy local wholesale prices and low feed costs have protected margins and encouraged production.  

While herd numbers have been more or less stable, improved feed quality has boosted cow yields. 

In addition, the return of some water to the parched south-west of the country is reducing the deficit in this important dairying region.  

Our latest Global Dairy Directions analysis is for US output growth to strengthen as the all-important income over feed costs (IOFC) ratio heads into expansion territory over the coming months (Figure 1). 

Screen Shot 2016 11 07 at 2.12.43 pm

The question then becomes, where will the additional milk go?  

Fluid milk sales are flat to declining in the US.  

Fluid milk sales have accounted for around 25% of annual production in recent years, but have been steadily losing share.  

We estimate around 23% of US milk output in 2016 will be accounted for by fluid milk alone, with sales stabilising into 2017. 

So with more milk available for manufacturing, it’s hoped that much of this milk growth will be directed toward cheese production for a still buoyant local market.  

Cheese is by far the most important product for the US industry, its production uses around 75% of manufacturing milk, and as such it has a major influence on farmgate price for producers. 

Local cheese demand has been well above long-term averages throughout 2016, boosted by “other cheese” rather than cheddar sales.  

Cheese sales have been strong in the retail and particularly the foodservice sector, and it’s vitally important they stay that way.  

US cheese stocks are huge at the moment, but as Figure 2 illustrates, days in stock isn’t too far out of whack.  

Screen Shot 2016 11 07 at 2.15.18 pm

In other words, with demand still healthy, the days need to utilise stock is comparable with the recent past.  

No need to panic, right? 

Nevertheless, the government has seen the need for a spot of intervention.  

The USDA announced back in August it would spend around US$20 million purchasing 5,000 tonnes of cheese, as farmgate prices for the month dipped 30% below the record highs of 2014. With stocks sitting at over 560,000 tonnes this is literally a drop in the ocean, but the USDA announced it will purchase another US$20 million of cheese in October for its food assistance programs in an effort to stabilise prices. 

While cheese will be important in soaking up the extra milk, plants in major milk growth regions are reportedly mostly full. Improving Californian supply will direct more milk into skim milk powder, a product that hasn’t been in favour given the strengthening US dollar and high local prices for butter and cheese have kept manufacturers focused on the home front. 

US butter prices have also been well above global benchmarks during much of this “commodity super down cycle”. 

 Local demand has been bolstered by major fast food chains switching to butter and the generally increased popularity of the more natural fat.  

This has encouraged output and built healthy inventories – reported to be 43% ahead of the same month last year in September and 46% above the 5-year average.  

Over the past few months, the weight of stocks has driven US prices lower, but an almost concurrent improvement in EU wholesale butter values has improved local product competitiveness, and will at least stem the flow of imports. 

So with the US dairy situation finely balanced, the major wildcard for the industry is next week’s Presidential election. 

Demand for cheese has been bolstered by low oil prices and improved economic conditions that offer consumers more dollars to spend on eating out, but what might the results of the election bring? 

A Clinton victory has been billed as a “more of the same” result, with her administration likely to build on the program of the Obama years with some tweaks. 

 A recent survey conducted by the US National Association of Business Economists found 55% of the 414 respondents thought Hillary Clinton would “do the best job as president of managing the economy”, compared to 14% who favoured Donald Trump.  

Trump’s policies have been assessed by the bipartisan Committee for a Responsible Federal Budget, and its estimated the combination of proposed tax cuts and spending increases would lift US public debt from 77% to 105% of GDP over the next decade, compared to 86% for Clinton.  

Trump’s preference for walking away from trade deals and taking a more aggressive protectionist approach to China and other trading partners have also raised concerns.  

In the short term, a Trump victory is likely to send the US dollar lower, increasing the competitiveness of dairy exports.  

The more uncertain, and potentially chaotic Trump policy program could potentially impact on business investment, employment and consumer sentiment – which in turn would dampen demand for cheese and butter, as people are less able or inclined to eat out.  

Under these conditions, and with the inevitable lag in supply response on farm, more milk might be directed to the export market in the form of skim milk powder, cheese and butter. 

So while the US has been flying under the dairy radar, we may be paying it a lot more attention in 2017! 

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