Dairy outlook depends largely on El Niño

June 19, 2014 06:50 AM

In his speech at INTL FCStone's 11th Annual Dairy Outlook Conference on June 18, vice president of FSCStone's food division Robert Chesler focused his dairy outlook on milk (CME:DFM14), suggesting there's been a "global trend of more milk" in the dairy market over the last year.

Chesler pointed out that almost all of the major milk-producing countries are up in production and price. Moving forward, he discussed what factors could impact whether the market sees a massive correction or sustained growth.


El Niño

El Niño, which could be especially strong this year, remains the major potential destabilizer of the market globally, Chesler said.

New Zealand's production will depend largely on El Niño's effect, as will production in the U.S., particularly in California. Chesler said the current drought in California, however, is overblown — they're still making a lot of milk.

"Stop listening to (talk about the drought in California)," Chesler said. "The drought is a problem ... but the problem from a milk perspective rolls into next year. The hay that needed to get water for cutting this year got water. They're going to feed that first cut to their cows, but it's the subsequent cuttings of hay that are going to hamper quality — they'll have to go to dry cuts."

If El Niño brings rain to the West, California will be very bullish, he said.


European milk quota

Another major factor that could impact market volatility and price is the EU's abolition of its milk quota in April 2015.

"We believe (European) dairy producers are going to get the price signals much faster and are going to make changes to the milk supply at a much more rapid pace," Chesler said of the milk quota aftermath. "Simply put, they're going to try out the gate to make more milk."

Chesler predicted the EU's model will start to look more like the current U.S. model. After the supply burst, he said the big issue for the EU will be how effective its milk processing can be.

China's supply side crisis

In China, demand is growing near 5% for Q1 in 2014, but buying has still slowed down, Chesler said. The larger problem is on the supply side — there's more than a 10 million metric ton gap between what they produce and what they need to buy, he said.

China is focused on stock rebuilding and improving domestic milk produciton, which is why buying is relatively down, but it could take three to five years for China to produce the milk volume that they've lost in recent years.

A government-forced shift from small scale farms to large scale farms will slow this process, as will rampant environmental disease, Chesler said.

About the Author

Thom is an editorial intern at Futures. He studies magazine editing, economics and sociology at the University of Missouri and will graduate in May 2016. You can reach him at thodix2@gmail.com