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Rising consumer demand benefits dairy farmers

The growing market pull comes in the wake of lower prices and the face of trade uncertainty

The first half of 2018 has brought positive signs for dairy farmers but it’s hard to predict what the rest of the year will bring, says Farm Credit Canada.

Butterfat production increased six per cent year over year to the end of April, bringing higher total revenues to producers even with a lower milk price, says J.P. Gervais, FCC’s chief agriculture economist. However, international skim milk powder prices remain at historical lows, showing little upside for the rest of 2018.

“The Canadian milk price will be roughly in line with the 2017 average price which, combined with growing Canadian production volumes, yield a favourable outlook for Canadian dairy profits,” he said.

While the average milk price for the first three months of this year was as much as three per cent lower than the 2017 average, he said, “The increase in the butter support price effective Sept. 1 will lift the milk price paid to producers.

“Butter stocks have steadily increased since mid-2015 and reached 43,000 tonnes in May, exceeding the industry target of 35,000 tonnes,” he said.

Production cutbacks in the second half of 2018 will help to better align supply with market requirements. “They should help sustain a higher milk price, although it’s difficult to predict price patterns without knowing how the pace of consumption growth will compare to changes in actual milk production.”

Production costs were three per cent to four per cent higher year over year in the first half of 2018 mostly due to higher feed costs, energy prices and interest expenses, he said. However, feed grain prices are projected lower for the second half of 2018.

Retail dairy prices fell on average by 0.5 per cent between June 2017 and June 2018 while butter and cheese prices declined by four per cent and two per cent respectively, he said. “That softness helped improve dairy’s pricing relative to many foods — overall inflation in Canada climbed 2.5 per cent and food inflation increased 1.4 per cent at the same time.”

Demand for dairy products rose during that period with cheese and yogurt con­sumption growing between two per cent and four per cent in the first three months of 2018. The fluid milk market is holding steady and butter demand is still expanding, with over four per cent annual growth.

On the cost side, interest rates slowly trended up while the loonie hovered in the US$0.78 range, he said. Global market forces played a big part in Canadian competitiveness and the profitability of our agricultural sectors in 2018 to date.”

Among the factors affecting the dairy sector are the industry’s continued investment in processing capacity to market innovative products, contributing to raise the demand for milk, an uncertain global trade environment, the uncertain future of the NAFTA negotiations, the not fully complete status of the Canada-Europe free trade deal and Canada’s unsettled status in the Pacific free trade deal.

Interest costs could stabilize because the Bank of Canada is unlikely to raise its interest rates because of the pressure on Canadian exports caused by the international trade tensions, which are holding down the loonie’s value.

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