Guest Columns

Perspective:
Market Insight

A look back at 2014

Sara Dorland

Sara Dorland is managing partner with Ceres Dairy Risk Management LLC in Seattle. She is a guest columnist for this week’s Cheese Market News®.

At the end of 2014, U.S. dairy markets finally produced the price correction many were waiting for earlier in the year. Prices for cheese, butter, nonfat dry milk (NDM) and even whey spent much of 2014 at historically high prices levels to the displeasure of buyers. But now, fortunes have reversed, and U.S. dairy product prices are plummeting to the dismay of dairy producers. U.S. dairy product prices were resilient this fall, with a rather amazing ability to shake mounting evidence of lower prices ahead. In hindsight, faltering demand in China, Russia’s ban on western dairy products, stronger world milk production and significantly lower global dairy prices were all signs that domestic price changes were imminent.

2014 could go down in the history books as the year that China drove prices higher and then ultimately caused world dairy prices to falter. In 2013, China’s whole milk powder (WMP) imports shot 53.4 percent higher than the prior year. The frenzied pace of imports spilled into early 2014 as China’s first half WMP imports were a staggering 74 percent higher than 2013’s heady pace. Many in the industry were more stunned by how long China was able to sustain such high imports into 2014 vs. the ultimate easing back of demand in the second half of the year. Last year at this time, restocking was an explanation used to help explain China’s imports. Ultimately, it was a massive amount of buying ahead in early 2014 that may have masked a deteriorating demand situation throughout the first half of the year. Faltering domestic demand, recovering milk supply and burdensome stock levels all collided mid-year. The result was a sharp decline in China’s WMP imports. China’s WMP imports from July to November tumbled 49 percent compared to the prior year’s levels and in most months fell below the pace set in 2012. Throughout the world, manufacturers shuffled product mix in 2013 to meet China’s insatiable demand for WMP. A year later, those same manufacturers were once again shifting product mix but this time toward cheese, butter and skim milk powder (SMP) as WMP demand had vanished almost as quickly as it had arrived. Mid-year, the dominos began to fall as other dairy products that were once well-balanced began inching toward over-supplied.

China was not solely responsible for tipping the scales on global dairy markets. Russia’s actions in 2014 have had wide sweeping geopolitical impacts that have spilled over into the dairy industry. In August, Russia banned dairy products from several regions including Australia, the European Union and United States. The ban severely impacted the European Union. Almost overnight, one of Europe’s largest cheese and butter trade partners vanished. After the ban, European cheese exports fell behind last year’s pace in August and September by 28 percent and 25 percent, respectively. With WMP markets already under pressure, and outlets for cheese limited, European manufacturers had to divert milk to butter and SMP production. By September, EU-28 SMP production was running 38 percent higher than the prior year, with WMP and cheese production falling behind the prior year by 16 percent and 3 percent, respectively.

At the beginning of 2014, Europe and Oceania were producing substantially higher amounts of milk; however, the United States was still not making significant headway in ramping up milk production output to meet global demand. Finally, mid-year U.S. milk output began to rise with year-over-year gains reaching 2-4 percent each month. The unfortunate timing of milk production from Argentina, Brazil, Europe, Oceania and the United States collectively rising to more than 4 percent through September put a lot of pressure on manufacturers. A dairy system already overwhelmed by faltering demand was now being oversupplied. In the final quarter of 2014, milk prices in Europe and Oceania collapsed as manufacturers looked to recalibrate milk price with world dairy product prices.

All the while, U.S. dairy products maintained well above-average price levels headed into the holiday season. The NDM price was the first to show signs of stress in early September. However, domestic NDM prices were able to preserve pricing in the $1.40s between September and November and at a substantial premium to global SMP prices. U.S. butter prices set all-time highs this year, reaching well into the $3 price level and panicking buyers who were concerned about potential butterfat shortages leading up to the holiday season. Similarly, U.S. spot cheese prices stayed above $2 for most of 2014 as U.S. cheese exports sailed ahead of prior year levels keeping stocks low.

However, a strong U.S. economy and dollar along with sky-high domestic dairy product prices began to cause fissures in U.S. dairy markets. In the fall, U.S. dairy product exports slowed as a strong currency and high prices sent global buyers abroad to source lower-cost dairy products. Historically high prices finally turned on the milk spigot in the United States and supply started to flow. Slower exports and abundant milk were enough to tilt the impermeable U.S. milk market to oversupplied. Like cracks in the dam, there were too many to prevent the structure from giving way, and U.S. cheese, butter and NDM finally collapsed. From their highs, most U.S. dairy products have lost close to 50 percent of their value.

For U.S. dairy markets, 2014 was a wild roller coaster ride with prices at all-time highs only to be followed by multi-year lows. At the start of 2015, U.S. dairy appears to be headed for a bout of low prices. But with any roller coaster, lows are typically followed by a slow climb higher — setting up 2015 to be yet another interesting year for global dairy products.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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