Higher world dairy prices good for Canadian producers

According to the USDA’s latest WASDE report, the U.S. price of skim milk powder (SMP) is expected to increase more than the price of butter through the end of 2017. Higher U.S. prices for SMP would be good news for Canadian dairy producers.

Here’s why.

Skim milk surplus

U.S. and Canadian markets both have an excess supply of skim milk. This is due to increased demand for dairy products with a large butterfat component (see FCC Ag Economics: The Canadian Dairy Sector Looking Forward for an explanation of the SMP/butterfat composition breakdown).

The surplus of skim milk in Canada has resulted in more milk being marketed at prices that are near world price levels, or even lower as in the case of dairy proteins marketed in the animal feed market.

Any sustained rise in world prices would only occur if global demand continues to grow – as it is in China, which is showing double-digit growth in many dairy product segments. But world dairy production must also start to taper off and that’s not happening as quickly as expected. Despite world prices being low for some time, large producing countries haven’t cut production enough for it to make a difference.

In the U.S., the dairy herd has expanded, pushing up production and pressuring overall milk prices. These will reflect lower U.S. prices for cheese and butter. EU milk production is also trending higher in 2016 than in 2015, although the last few months suggest a production slowdown is on the horizon. And a slowdown in New Zealand milk production seems imminent: it was 2% lower for the first three months of the dairy year than it was at the same time last year.

The upshot?

While global dairy supply and demand will take some time to reflect wholescale re-balancing, it’s starting to occur and can be expected to pick up throughout 2017.

A strengthening Canadian dairy sector

As the dairy industry continues to evolve, a sizable and growing share of Canadian milk is marketed at prices that are close to world prices. As the world markets transition to a projected balance between global supply and demand, Canadian producers’ prices and margins should improve.

We’ll be providing more updates on dairy markets in the months to come. Check back often.