As Canadian butterfat production climbed, so did skim milk powder (SMP) ... Canadian dairy revenues were hit hard. ... P
FCC Ag Economics
Economic Snapshot of Canada’s Dairy Sector July 2017
Canadian dairy cash receipts projected to grow 11% into 2018* 6.9
CAD (billions)
7.0 6.5
6.5 6.1 6.0 5.5 5.0
5.8
5.9
5.9
2012
2013
6.2 6.0
5.5
2010
2011
2014
2015
2016
2017p
2018p
*Farm cash receipt forecasts assume an average US$0.75 CAD for 2017
FCC Ag Economics expects farm cash receipts in the dairy sector to climb 5.5% in 2017, reaching $6.5 billion in revenues at the national level. We project 2018 farm cash receipts to grow a further 5.5%, reaching $6.9 billion.
Production growth will drive revenue gains more than milk prices Between May 2016 and April 2017, butterfat production for fluid milk increased 0.8% from the previous 12 months, and butterfat production for industrial milk production rose 5.5%. That was a response to low butter inventories and shifting consumer preferences for natural dairy fat that led to growing demand for butterfat. Milk production increased 3.5% between May 2016 and April 2017 compared to the previous 12-month period in Canada. We expect this pace of growth to accelerate slowly over the next 18 months. As Canadian butterfat production climbed, so did skim milk powder (SMP) production, a global trend based on strong milk production in Oceania, Europe and the U.S. The world price of SMP dropped in response to growing global supplies, reaching a record low in 2016.
Sector highlights: next 12 months 1. Dairy revenues projected to climb 2. Farm prices will trend slightly upward 3. Milk production growth to continue 4. Profitability expected to be positive on average 5. Retail demand for cheese, yogurt may slow down, yet remains robust Canadian dairy revenues were hit hard. More than 20.0% of Canadian SMP was marketed at prices that, at most, matched the world price in the 2015-16 dairy year. This included 11.0% of Canadian milk that was marketed in class 4(m) – a milk class marketed below world price, used for animal feed and other products. 4(m) milk declined as a proportion of all milk to 5.6% in the current dairy year, a shift that helped to stabilize Canada’s domestic price last year. After two years of price declines, the per-unit milk revenue for Canadian producers climbed on average 1.4% when comparing the first four months of 2017 to the first four months of 2016.
That pricing trend is projected to continue, despite expectations of a projected 1.8% growth in U.S. milk production in 2017 and 2.3% increase in 2018. U.S. supply will help keep markets depressed for SMP into 2018, but the Canadian milk price should remain stable. Recent USDA projections call for the average U.S. price of SMP to climb 10.0% in 2017 over the 2016 average, followed by a 6.0% increase in 2018. Also, 2016’s national ingredient strategy established a new pricing structure, making Canadian dairy ingredients used to make cheese, yogurt and other dairy products, more competitive with imports from the U.S.
Domestic demand for dairy products to remain strong Dairy retail prices started to decline in 2016. And the trend continued in the first half of 2017 as a result of strong retail competition. Lower retail prices and shifting consumer preferences toward natural fat were behind the strong increases in Canadian consumption of butter, cheese and yogurt. Per capita consumption of fluid milk continues to decline, but overall demand of dairy products is expected to remain strong.
International demand for dairy products is robust Low world dairy prices have arisen from supply strength, not waning demand, which continues to climb, especially in emerging markets. OECD-FAO projections call for China’s consumption of SMP to grow 4.4% on average each year over the next ten years. Chinese butter consumption is projected to grow an annual average rate of 2.6% and cheese at 3.9%.
Profit margins should remain positive into 2018 Dairy producers’ margins should be positive and remain close to the sector’s average cost of production (CoP). The July 2017 WASDE estimates for 2017-18, the average corn price at US$3.30 and the average barley price at US$5.55. The weak Canadian dollar – with the average in the second half of 2017 expected to remain below US$0.78 – will convert low world dairy prices into a higher Canadian price, supporting revenues. A low currency also raises the cost of equipment imported from the U.S. and Europe, but the growth in Canadian milk prices will be able to match most CoP increases.
On the radar for 2017-18 • Market access of foreign dairy products into Canada: – Implementation of the Comprehensive Economic and Trade Agreement with the European Union (CETA); higher access for European cheese in the Canadian market. – Renegotiation of the North American Free Trade Agreement (NAFTA). – Possible renewal of the Trans-Pacific Partnership (TPP) agreement, including large dairy producers, Australia and New Zealand. • Growth in the demand for butterfat in Canada and resulting increases in production quota. • Consolidation and expansion of dairy operations. • Patterns in the USD/CAD exchange rate. Trends in oil prices, and interest rates in Canada and the U.S., will determine the value of both currencies. • Weather patterns and potential disruptions in the supply of available feed grains.
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Learn more about the economic events that could impact our industry and your bottom line. Our team of economists and researchers share their unique perspectives in the reports, videos, blogs and articles available on our website. fcc.ca/AgEconomics
Follow the team on Twitter J.P. Gervais Martha Roberts Leigh Anderson Craig Klemmer Amy Carduner
@jpgervais @MJaneRoberts @AndersonLeigh3 @CraigKlemmer @ACarduner
