by Peter Vitaliano
The author is vice president, economic policy and research, National Milk Producers Federation.

This year is shaping up to be a very good one for dairy farmers. The reason, without oversimplifying much at all, is this: The entire planet is short of milk, not so short on feed, and the situation is not going to change in a hurry.

To say that the global milk supply is tight means, of course, that it hasn't been growing as fast as total worldwide demand recently. Showing this concept definitively requires data on milk production, dairy product consumption and trade in all the world's countries - data that is difficult to compile on a current basis with any reasonable degree of completeness. But the following selected facts can give a strong indication of the situation.

Importers importing more
The top 20 net dairy importing countries in recent years are a key group to watch. Those 20 countries represent areas where domestic milk production falls most below their domestic dairy product consumption. As a group, they have collectively grown their net imports of dairy products by an average of more than 300,000 metric tons of milk solids (milkfat plus total skim milk solids) per year over the past two years. These countries, with China being the 800-pound gorilla among them, account for much of the surge in world dairy import demand in recent years. Again, the chief reason is that their growing domestic consumption of dairy products continues to outpace their internal capacity to supply it.

Over the same period, the eight largest net dairy exporting countries have expanded their total milk production by just about the same amount. Put another way, these eight countries have the largest exportable supplies of dairy products over and above their domestic consumption needs. These eight countries supply virtually all of the originating dairy product exports (as opposed to re-exported products) to meet this growing dairy import demand.

Two of these, the United States and the 28-member European Union (EU), have large and growing domestic markets to be supplied, as well. The U.S. alone has needed more than 100,000 metric tons of additional milk solids each year to supply its average domestic dairy demand growth over the past couple of years.

Took a sharp turn
This generally-balanced world dairy supply-demand situation took a sharp turn in 2013. China alone imported about 300,000 metric tons more total milk solids in 2013 than in the previous year, and the top 20 net importing countries together grew purchases by a bit less altogether.

At the same time, total milk production in the eight top dairy exporting countries was flat, according to USDA statistics. Milk production in New Zealand and Australia was down last year due to drought earlier in the year, while U.S. and EU production grew only modestly.

In the resulting scramble by importers to secure supplies, Australia's entire production for the following year was fully sold-out by last summer. Meanwhile, New Zealand essentially did the same by last fall, and there are reports that the Kiwis are currently finding it necessary to actually ration some of these commitments.

U.S. dairy exports surged from the equivalent of about 12 percent of domestic milk production at the beginning of the year to about 17 percent during the most recent six months. Product was diverted from U.S. manufacturing to export sales, and prices have been bid up in the ensuing competition for the short supplies among all buyers worldwide.

Projections from USDA indicate that the eight largest supplying countries will expand their total milk production in 2014 by about 550,000 metric tons of milk solids over last year, with more than a third coming from the U.S. So far, there have been scant signs of this. USDA reported that production was essentially flat in November compared with a year earlier.

Production surges in this country are usually presaged by expansions in the milking cow herd, but the herd size has been remarkably stable, with year-over-year changes stuck in the narrow band of plus or minus one-half of 1 percent for the past 18 months. Looking back as far as 1998, the longest previous stretch of herd stability by this measure was nine months in 2004 and 2005. Typically, the number of milking cows in the country moves in cycles of expansion and contraction, with no precedent for such an extended period with no discernible movement in either direction.

Will demand continue?
On the demand side, we may not see a repeat of last year, when China sucked all of the air out of the room, so to speak. But neither is there reason to believe that milk production growth will seriously outpace continued growth in worldwide demand for dairy products in the near term, especially with so many international pipelines depleted. New Zealand and Australian production is rebounding, but only back to pre-drought levels, according to USDA. All told, the dairy supply-demand situation is consistent with the futures-based price forecast, as of the first week in January, that U.S. average milk prices will hit a record this year, topping 2013's average by about 70 cents per cwt.

The outlook for feed costs in 2014 is also a favorable one for dairy farmers. A record harvest in 2013, coupled with a slowdown in the growth of ethanol production and demand, have clearly eased corn prices. This makes corn something of a poster child for a broader decline in prices of many commodities, including non-agricultural commodities, such as metals. At the beginning of the year, the futures markets indicated that the cash price of corn in 2014 would average about $1.60 a bushel less than in 2013.

In the same vein, the start-of-the-year outlook for all of 2014, compared with 2013, projected that soybean meal would ease down by about $70 a ton, alfalfa hay down by $20 to $30 a ton. That would place the total cost of producing milk, based on USDA's monthly cost of production methodology, lower by roughly $1.80 per cwt. of milk. About the only factor that could change this year's cost outlook significantly for the worse would be another round of serious widespread weather disruptions during the period from planting season through the early summer.

Combining the milk price and cost of production forecasts, cash margins over production costs should be about $2.50 per cwt. higher this year compared to last, making 2014 the first good year for dairy farmers since 2011 and the best since 2007. Market forces will inevitably ease the current tight milk supply and relatively ample feed supply situations. But there is a certain robustness to both situations, which should allow U.S. dairy farmers to stay in a sweet spot for a while this year as long as the world continues to experience both "Got Milk?" and "Got Corn!" moments.

This article appears on page 71 of the February 10, 2014 issue of Hoard's Dairyman.

Return to the Hoard's Dairyman feature page.