November market report

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An October plummet in domestic nonfat dry milk spot prices means protein powder markets are the talk of the industry.

The drop-off comes after months of relative stability in the market. After hitting a high of $1.0525 in early January, the market wavered in a range of $0.7900 – 0.9000 all spring. Then, in mid-June, it settled into a trading range of between $0.8050 and $0.8800 and stayed there until Oct. 10. That’s when a breakout sent prices down five cents in nine days.

It’s odd for this to happen in October. Normally, this is the time to prepare for holiday orders and the next year’s contracts. That activity sends signals to the market responsible for its cyclical wintertime peak.

But none of those signals has come, markets remain weak and we’re digging in to try to explain what’s happening. We think it’s due to the factors explained below:

Lifting EU quotas

Perhaps the lifting of milk production quotas in the European Union in 2015 is partly responsible for markets as they stand more than two years later. Under the quotas, farmers were penalized for producing too much milk. On the flip side, this cap on supplies kept prices stronger than they would have been with dairies free to produce all they wanted.

But EU leaders saw struggles on the horizon due to population growth, so the quotas were lifted. European Commission statistics show that herd sizes increased immediately. Official milk production data for 2016 —the first full year without the quotas— should be available next month. But signs are pointing to what we all assumed would be the case: With no quotas in place, production increased alongside growth in herds.

Supply and demand

Global milk production has been strong in recent years. For example, U.S. milk production has increased 14% in the last decade. European milk production ceilings were bumped upward each of the last few years leading up to the quota suspension, something the European Commission called a “soft landing.” Milk production in New Zealand slowed last year for the first time in almost a decade, but it’s poised to bounce back and break national records by the end of the 2017-2018 season.

But, aside from a shortage of butter in Europe that’s keeping prices in that market strong, worldwide demand for dairy products largely has not kept up with bulging supplies. With extra milk on hand and no better prices to be paid in other markets, handlers have chosen to convert to powder and the extended shelf life it affords. 

Intervention policy shift

One of the ways the EU weakens the blow of wild market shifts is a “public intervention” policy of buying up stores of products. With production so high, and the decision to convert to storable powder so widespread, the Intervention Commission has regularly bought and held large stores of nonfat dry milk to keep prices from bottoming out in recent years.

In fact, in April 2016, almost exactly a year after milk quotas were suspended, the public intervention ceiling for skim milk powder was doubled.

But the Commission announced this fall it intended to offload around 125,000 tons of its aging SMP stocks in the near future via tender. The EU intervention program closed for the season at the end of September. Commissioner Phil Hogan has hinted at potential changes to the system upon its reopening in March 2018.

A few things being discussed are setting the buy prices to zero, yet creating tenders based upon current market conditions for future purchases and capping the amount the Commission will purchase. World market prices plummeted on Hogan’s comments, sending a strong signal to the U.S. that resulted in the price washout we saw in early October.

What we’re watching

With nonfat dry milk prices so low, and without any signals indicating things will change, we’re keeping keen eyes on futures markets in 2018. Currently, domestic dairy markets are lackluster at best. Butter prices remain comparatively strong but are eroding. How low will they go? And will the cheese price follow suit?

Even though sending milk to Class IV processors for conversion to storable powder has long been a defensive maneuver for the industry in times like these, it may not be effective this time around. For one thing, there’s already more milk flooding markets than we know what to do with. All segments of the market —from Class I down to Class IV— are already flush with product. For another, those strong butter prices mean milk has been shuttled to that market to take advantage. The side effect is that heightened butter production has resulted in a corresponding glut of solids.

Domestic NFDM dry storage data paint the rest of the picture: In each of the last two years, product in storage peaked in July. There were 270 million pounds of NFDM stockpiled in 2015, and 257 million pounds for July 2016.

This July, though, there were 296 million pounds of NFDM in storage, and stockpiles have continued to soar since then. In September, the most recent month for which data was available, 321 million pounds of NFDM sat in warehouses. That’s despite data showing NFDM production in the U.S. keeping pace with —if not exceeding— production in each of the last two years.