The dairy economy is in rough shape. This is what Ken Bailey, PhD shared with a group at the Dairy Financial and Risk Management Conference earlier this month in Harrisburg, Pa. Bailey has devoted his entire career to the economics of the U.S. and global dairy industries. 

Bailey shared with the dairy audience that the Federal Reserve has tightened down on the economy, raising interest rates to cause enough of a strain to push towards a slowdown. He said that the U.S. dairy market is hampered by suppressed demand, both at home and abroad. 

“The Conference Board forecasts that the growth seen in many parts of the economy will gradually buckle under mounting headwinds later this year, leading to a very short and shallow recession,” Bailey says. “This outlook is associated with numerous factors, including elevated inflation, high-interest rates, dissipating pandemic savings, lower government spending, and the resumption of mandatory student loan repayments. We forecast that real GDP growth will slow to 1.9% in 2023, and then fall to 0.5% in 2024.”

The Federal Reserve’s goal is for 2% inflation. Although, inflation posted its biggest monthly increase this year in August as consumers faced higher prices on energy and a variety of other items.

The consumer price index, which measures costs across a broad array of goods and services, rose a seasonally adjusted 0.6% for the month, and was up 3.7% from a year ago, the U.S. Department of Labor reported. The Wall Street Journal reports that mortgage interest rates hit 7.09%, the highest in 20 years and says that “would-be buyers are locked out and would-be sellers are staying put.”

Slowed Demand in China

All of the above has caused the food price indexes calculated by the Food and Agriculture Organization of the United Nations (FAO) to decline in 2023. Bailey says that a decline in global demand is a major factor contributing to price decreases. In fact, global dairy prices have been declining since 2022. This is especially concerning, as China’s economy is expected to slow. The U.S. Dairy Exporter blog reports that the U.S. low-protein whey exports to China dropped 21% year-to-date and that decline continued in July with exports falling 46% to the lowest monthly levels in 18 months. 

The U.S. Dairy Exporter blog reports that “the fall in whey exports to China largely reflects weaker demand in the feed sector.”

“There’s a lot of other factors in China,” Bailey says. “The bottom line is they’re making a little bit more milk and their economy is slowing down. Their ability to buy dairy products has slowed now the U.S. isn’t radically dependent on China dollars on cheese or the skim powder they buy.”

U.S. Milk Production

When it comes to milk production in the U.S., Bailey reports that farm milk production for the first half of 2023 is even with a year ago. He shares that “economics does not favor an expansion,” but says that component production continues to rise above year-ago levels.

“Demand is down, and farmers are delivering more than enough components to meet market needs,” he said. 

Bailey shared that milk production has slowed down in response to summer heat and lower prices.

“Some of this milk production slowdown is being offset by high component levels,” he says.

“Milk fat is increasingly ending up in cheese and butter production. Slower exports are overhanging the market, especially for dry protein. The EU is exporting more cheese and more butter to New Zealand. All of this is adding up to lower U.S. milk prices for the foreseeable future.”

The all-milk price has declined from $27 per cwt. in April 2023 to a low of $18 per cwt. by June.

“The all-milk price is forecast to reach $21 per cwt. by September 2023,” Bailey shared. “Higher prices will come when domestic and global demand resurges in 2025.”

Source : Dairy Herd sep 22 by Karen Bohnert