Economist Dan Basse already is hopeful that 2019 will be a better year for the dairy industry, with the potential for a Class III milk price over $17 per hundredweight by late-summer and perhaps $18 by the fourth quarter. But a Trump administration trade deal with China would make the outlook even better.
Renewed trade with China is needed to start the next agricultural demand bull market, according to Basse, president of AgResource Company in Chicago, who addressed a Nov. 21 dairy market outlook webinar hosted by the Professional Dairy Producers of Wisconsin.
Basse said the best the dairy industry likely can hope for out of this week’s trade talks between President Donald Trump and Chinese President Xi Jinping is that negotiations would continue and potentially lead to a trade deal early next year.
“The Trump administration won’t want to head into the 2020 elections with China trade still on its back,” he said.
Basse said U.S. dairy herds remain in liquidation mode, and Wisconsin could lose as many 750 farms this year, but the downside is limited. Milk production is falling more slowly, even amid rising yields per cow. The dairy cow inventory is in retreat, with a bottom of 9.3 million head expected for 2019.
“There’s still more liquidation to work through, but this is part of the process to getting the market to turn around,” he said.
A resolution of issues related to trade and tariffs is needed in order to “brighten the landscape” for dairy producers, he said. “A new demand driver is needed to fuel a lasting bull market.”
The resumption of trade with China is top of mind, especially for industries such as walnuts and cotton, which send almost 80 percent of their production overseas, according to Basse. The U.S. dairy industry ships 15 percent of its production overseas, and as a whole, U.S. farmers export more than a fifth of what they produce.
A China trade deal is even more critical than passage of the U.S.-Mexico-Canada Agreement, which has about a 25 percent chance of being voted down by Congress, according to Basse. The new farm bill is first on the docket, he said, and there’s hope that it will get passed during the lame-duck session.
The USMCA faces some issues if it’s delayed into next year, Basse said. The old North American Free Trade Agreement remains in place and could be reenacted, but it’s important that Mexico and Canada drop their import duties.
“If Congress doesn’t vote for the USMCA and the Trump administration blows up NAFTA ... it would be very unsettling for markets,” Basse said.
Class III milk prices have been “trapped in a range” of $13.50 to $17 per cwt. for the past three years, he said, but they could finally “break out” of that in 2019. While New Zealand milk production is going strong, Basse said a decline in European Union production and milk powder stocks could bode well for U.S. dairy.
“To turn the milk markets, we need to turn the powder market,” he said. Butterfat demand and prices have been good, but “powder needs to turn,” and it could rise going into the first quarter of 2019.
“This should give us a possibility of milk prices moving slowly higher initially and gaining speed as we head into the summer,” Basse said.
U.S. dairy exports have been growing by about 7 percent this past year, helping absorb some of the record-large supply, he said. This has occurred despite the turmoil with trade and tariffs.
“To have a dairy export market in 2018 that wasn’t down is really relatively exciting,” he said. “I’m bullish on butter and cheese in 2019.”
Other concerns likely to linger into 2019 include the world political and economic “disorder,” including U.S. trade issues, Brexit and “uncertain politicians” such as Russia’s Vladimir Putin, he said. Agricultural markets likely will be volatile the rest of this year and well into 2019.
“Dynamic politics and economics produce heightened ag market volatility,” Basse said. “These are dynamic political times.”
He also expects changing weather patterns, with increased frequency of flooding and drought, to be of concern in the new year. Climate change is real, he said, and scientists have a better understanding of it. Climate change will produce a globally favorable or unfavorable environment for agriculture, and 2018 was mostly unfavorable, he said.
“Don’t fall back and let feed prices that are cheap, historically speaking, get away from you,” he said.
Dairy producers who buy feed will want to keep a close on feed prices next year, and U.S. corn stocks are down, presenting new margin risk for end users.
“We just don’t see U.S. corn stocks getting back to where they were in ‘16 or ‘17 unless we have a tremendous yield,” Basse said, adding that more U.S. corn acreage is likely to be planted next year, but that doesn’t change the overall landscape of the corn market. He said $3.50-$3.55 per bushel would be a good purchase point to keep in mind.
World meat production is predicted to be at record levels into 2020, and there are no indications that pork, poultry or beef producers are considering ending their expansion plans, according to Basse.
U.S. interest rates are rising on the strong economy, he said, and that economic strength could push the Fed to raise interest rates another one or two times in 2019. The U.S. dollar should peak in the first quarter of next year. The growing global debt is another cause for concern, he said, as it gives the market some anxiety.
“Where will the new stimulus come from?” he said.