Bozic bearish for 2015 milk price

ST. CLOUD, Minn. — Marin Bozic admitted his mailbox price projection for 2014 came in a little lower than actual, but like a weather forecaster, he offered another.

Bozic, assistant professor in dairy foods marketing economics in the University of Minnesota Department of Applied Economics, presented a 2015 dairy outlook at the Minnesota Milk Conference and Expo Dec. 3. There were about 550 paid registrants for the conference, plus others who walked in to visit the trade show and talk with vendors. Attendance was up from last year's snowstorm depressed attendance, said Eir SilvaGarcia, associate director of Minnesota Milk.

Bozic projected the 2014 milk price would be $19.10.

He has estimated the actual 2014 Minnesota mailbox price to be $24.03 per hundredweight based on announced Class III and IV milk prices and Class III and IV futures.

"This is one for the books," Bozic said.

The market consensus in December 2013 was that the price would be up in January before declining gradually for the rest of the year. Instead, the price jumped in the first and third quarters.

What happened in 2014?

Butter exports about doubled in the first quarter of 2014 above the first quarter of 2013, Bozic said. Other exports were positive as well. Exports were OK in the second quarter, but a decline in exports in the third quarter indicates challenging times ahead, he said.

The United States exports 15 percent of its total milk solids, Bozic said, but exports have been absorbing most of the growth in U.S. milk production during the past decade. If exports decline, dairy markets are going to be quite different than what producers have seen during the past few years, he said.

World prices are lower than U.S. prices, especially on dry products. The world currency for the dairy trade is the U.S. dollar and the primary effect of the rising dollar will be a drop in worldwide prices, Bozic said.

Another factor contributing to higher than anticipated milk prices was low stocks. Domestic disappearance has been "rather OK," and a tight butter market may shield producers for a while.

But, there has been robust milk production growth. The United States added five billion pounds of milk in 2014, the third highest growth since 2005. The European Union, which has been phasing out its quota system for five years, added 5 percent more milk. Its quota will cease in March 2015. Its domestic consumption is expected to remain unchanged.

If not for exports, the increase in milk production would have sent prices tumbling in the U.S., Bozic said.

California's extreme drought played into the market, too. Dairy producers there didn't add cows, but the area did receive rain last week.

The weather pattern appears to be changing with the rain in southern California, the warmup in the Midwest and a drought beginning in New Zealand. Water rationing has started in some counties in New Zealand because of the drought.

Another interesting factor is the increase in demand for whole fat milk. Bozic displayed the Time magazine cover from June 2014 proclaiming "Butter is Back." He said the consumers most at risk are those who drink fat-free milk. Once there, they are more likely to switch to other drinks.

This year also brought the introduction of branded milk. Fairlife is marketed as a premium milk in select markets now, but it is expected to launch nationwide in 2015. Coca-Cola is a partner in the project.

As with most macroeconomic discussions, a dairy economic discussion is not complete without a mention of China.

In 2013, China embarked on a reconstruction of its milk supply sector, Bozic said. They are vertically integrating their milk supply chain.

In late 2013, the country had an internal milk shortage and in the first half of 2014 it imported immensely, securing all the product needed for an entire year. As China stopped buying, prices tumbled. He expects them to be back in the market, but he also expects the country to grow its internal milk production. In other words, China won't be driving the export market in the short term.

Bozic's advice to dairy farmers is to prepare for a much different year in 2015. All the private forecasters are bearish and he, too, sees lower prices ahead.

His mailbox price prediction for 2015 is $17.50, with 80 percent confidence the price will be between $15.25 and $19.50.