"Nearly one out of seven tankers of milk that leave your driveway is sold overseas. That means the U.S. dairy industry is fully exposed to global markets," says Alan Levitt, vice president of communications and market analysis for the U.S. Dairy Export Council.
There’s a 90% correlation between U.S. and world dairy prices, says Levitt, who spoke Friday at one of the many educational seminars offered at World Dairy Expo. At the same time, the U.S. entre into global markets has allowed U.S. milk production to soar over the past decade.
Since 2004, production has grown an average of 3.7 billion lb./year, from 171 billion lb. to 196 billion lb. "In the last nine years, more than 60% of this new milk has gone to exports," he says.
So understanding global market is key to understanding current and future dairy prospects, he says. There are five main drivers of world markets:
• Global production and supply. Milk production increases have been on torrid pace, with global milk production up nearly 3% in the year ending April 2012. "That’s the equivalent of adding two more Minnesotas to the milk supply," says Levitt.
But since that time, production here and elsewhere has slowed considerably—with monthly increases less than 1% in June and July. U.S. and European inventories of milk powder, for example, are extremely low. "Without these buffers, supplies could be severely short by year end," he says.
• Consumption. China is birthing nearly 16 million babies each year, and the global middle class will grow from 430 million in 2000 to 1.15 billion in 2030. All these new mouths—and higher incomes to support better diets—will mean the long-term demand for dairy and protein will only go up.
China underpins world markets, because parents there just don’t trust their domestic milk supply after the melanin disaster, says Levitt. Since the melamine disaster several years ago, China has tripled it imports of dairy products.
While New Zealand has supplied most of those needs, other exporting countries like the United States has been able to back-fill dairy sales in other countries that were traditional New Zealand markets.
• Policy. Trade agreements and even domestic government policy is key in driving dairy trade. The Trans-Pacific Partnership, for example, could open up substantially more exports to Canada if such an agreement ever becomes reality. China’s leadership transition will also set the tone for future Chinese trade policy and imports.
• Price relationships. Commodity prices for corn, soybeans and milk are all tied together. "If corn stays above $7/bu, milk prices will have be above $20 to $22/cwt, or you won’t have a milk supply," says Levitt. Protein prices must also stay in synch. If they don’t, there will be substitutions occurring.
• Psychology. Market psychology could trump all other factors. "For example, there was a lot of early buying this summer on fears of shortages later this year because of the drought," says Levitt. The more people bought, the higher prices rose, and in the end, the fear of higher prices becomes a self-fulfilling prophecy.
So what does future hold? Levitt believes the global dairy industry is still very much a growth industry. It also appears that the U.S. is well-positioned to meet that need if it can adjust to higher feed, energy and input costs. "The world is going to need our milk," says Levitt.