Dairy farmers looking ahead to the new year and making management decisions may wish they had a crystal ball.

The dairy market is complicated with many moving parts. It is impacted by climate, global trade, quotas, production, feed costs, processors and more.

Penn State Agricultural Economist James Dunn, Ph.D., shared his insights and predictions for dairy markets in 2016. Dunn presented a workshop at the recent Penn State Dairy Cattle Nutrition Conference, where he offered participants insight into the many variables that go into the complexities of dairy forecasting and his predictions for 2016.

Regional variation

In the U.S., the drought in California is playing a role in their milk production numbers. Milk per cow is falling in this region, and with the drought continuing, overall production from the western states is expected to continue to drop in 2016. Water restriction regulations are of concern. No reduction in cow numbers overall has been seen yet, however, Dunn said.

The Midwest is gradually increasing milk production. The Great Lakes region is increasing both herd size and milk output. He expected Midwest growth to remain gradual.

“The Midwest is definitely interested in expanding further, and most of it is coming from new farms, which can expand easier than an existing farm,” Dunn said in an interview following the conference. “The climate challenges in California have spread to Idaho and Washington to some extent, so I don’t expect much growth there.”

A quota system imposed by Land O’Lakes – and potentially other cooperatives – is slowing growth in the Northeast. It has the potential to impact the Midwest as well.

Growth in the Northeast has been slow, and Dunn expected that trend to continue. Northeast dairy farmers had cooler summer weather, decreasing heat stress, and rainy weather, making for a good grass crop. Stored feed quality was also high. Even with the rainy weather impacting this season’s harvest, corn and soybean meal pricing is manageable. Feed cost per hundredweight of milk in Pennsylvania is right about average. Dunn forecasted that the all-milk price for Pennsylvania will be $18.40 for 2016.

Dunn predicted that overall feed costs will be good and could benefit producers in the West impacted by the drought, although hay costs will remain high. Milk prices for 2016 will be similar to 2015 pricing, and the income over feed cost should not show much change moving through 2016.

Dairy demand overall tends will be somewhat buffered from domestic economic drivers. Both the Consumer Confidence Index and the Restaurant Performance Index show improving economic outlooks, however, Dunn said. With economic recovery in the U.S. and improvements continuing, there could be changes in the demand for certain niche products. Gourmet cheeses, for example, decline in demand during a recession, while macaroni and cheese does not.

Export markets

There are numerous factors impacting dairy exports today. In the European Union, dairy quotas have been lifted as of April 2015, and milk production is increasing. The euro is down, and much of the EU is in an economic crisis. With the decrease in the value of the euro, imports from the U.S. will be at a disadvantage, and trade is expected to decline.

In Australia, the kiwi is slightly down, giving the U.S. a trade advantage. But the anticipated El Nino, which should have caused a drought year in New Zealand and Australia, did not emerge. Production remains strong, limiting export potential here.

Trade with China is slowing as the country has stockpiled inventory, a slowing economy and a devalued currency. Their milk production has seen a decline of 12 percent since 2012, due to weather and foot-and-mouth disease. However, trade here is expected to decrease in 2016.

A market that is unstable due to political concerns, yet is a traditionally positive, if overlooked, market for U.S. dairy exports, is the Middle East and North Africa, Dunn said. However, dairy exports to these regions were down 18 percent in 2015.

“Dairy exports are definitely down,” Dunn responded in a follow-up interview. “And that hurts all dairy farmers, because lower milk prices do not induce much additional consumption.”

Dunn reported that dairy futures are expected to remain stable over next year, with some gradual climbs. Dairy margins will be dependent upon hay, not corn or soybeans. Butter markets have steadily risen since October, although butter and cheese export markets remain below last year.

While no one can provide simple answers to an equation with so many moving parts, dairy managers rely on Dunn and other agricultural economists to clarify the many market issues that will impact the dairy industry in 2016. Acquiring a basic understanding of the market and the factors affecting milk pricing – and therefore profitability – is a wise business move.  PD

James Dunn also publishes a regular Dairy Outlook newsletter (available through his website), which was also utilized in this article.

Tamara Scully, a freelance writer based in northwestern New Jersey, specializes in agricultural and food systems topics.

GRAPHIC: Illustration by staff.