Demand driving dairy prices

by Ron Sterk
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CME Group cheddar block and barrel prices have eased slightly from record highs in early 2014, while prices for several other dairy products also have come off recent highs, but the decline may be temporary if strong demand and U.S. Department of Agriculture forecasts of higher prices in the second quarter come to fruition, despite an expected increase in milk production related to lower grain and feed prices.

Source: U.S. Department of Agriculture


“Strong domestic demand supplements export demand to tighten inventories and supports the product prices,” the U.S.D.A. said in its April 15 Livestock, Dairy and Poultry Outlook.

The price of cheddar barrels traded at the CME Group topped $2.30 a lb in late January and again in late March, up 20% since late December, up nearly 40% from March 2013 and up nearly 50% from the recent low set in March 2012. The 2014 highs eclipsed the previous record high of $2.25 a lb set in May 2008, a year that saw then record high grain and oilseed values.

Prices for other, but not all, dairy products also have been on an upward trajectory for weeks, if not months. Dry whey values have increased 20% since late September 2012. The rise has been much more gradual, but also more significant for high heat nonfat dry milk, which topped out around $2.22 a lb in late March, up 85% from a low near $1.20 a lb in late May 2012.

The U.S.D.A.’s Dairy Price Index for March was 126% of the 1990-92 base, up about 2% from February and up 33% from March 2013, according to the department’s latest Agricultural Prices report. The average price paid to farmers for all milk in March was $25.40 a cwt, up 50c from February and up $6.30 from March 2013.

While the previous record high prices in 2008 were mainly supply driven, the latest record highs appear to be mostly demand driven. In 2008, feed costs rose dramatically through midyear and milk production was declining as producers adjusted feed formulations to reduce costs. In 2014, feed prices are down from a year earlier and milk production is seen increasing as producers again adjust feed rations, this time to get more milk production per cow.

In its April 9 World Agricultural Supply and Demand Estimates and April 15 Outlook, the U.S.D.A. forecast 2014 milk production at 206.1 billion lbs, up 400 million lbs from its March forecast and up 4.9 billion lbs, or more than 2%, from 201.2 billion lbs estimated for 2013. If realized, it would be the largest year-over-year increase since 2005 when production of 176.9 billion lbs was up 6.1 billion lbs from 2004. Milk production in 2012 was 200.5 billion lbs, down 4.3 billion lbs, or 2%, from 2011 as severe drought in 2012 sent corn prices to record highs and sharply increased dairy feed prices. Milk output recovered only slightly in 2013 as producers still had to contend with high feed prices, as well as with lower cow numbers as the result of culling during the period of drought and high feed costs. The U.S.D.A. expects dairy cow numbers to increase in the second half of 2014 and post a slight increase for the year.

“Given favorable milk-to-feed price ratios, cow numbers are expected to increase later in 2014,” the U.S.D.A. said in its Outlook report.

Demand, both domestic and export, has outstripped supply of some dairy products. And the trend is expected to continue even as milk and dairy product supplies increase as the year progresses.

“Continued robust demand for dairy products, both foreign and domestic, tightens ending stocks on both a fats and skims-solids basis. The result is higher forecast dairy product prices (from March projections), except for nonfat dry milk,” which the U.S.D.A. expects will be restrained by stronger foreign competition. Second-quarter prices for cheddar, dry whey and butter were forecast to increase from the first quarter but N.D.M. prices were expected to decrease, while the department expects prices for all four items to decline in the third and fourth quarters. Still, the U.S.D.A. forecasts 2014 prices for all four key milk pricing components (cheddar cheese, dry whey, butter and nonfat dry milk) to average higher than in 2013.

But 2014 won’t be without production and cost hurdles, including drought in top milk producing California, nine-month highs in soybean futures prices last week and uncertainty about weather in general. But most analysts generally expect good crops in 2014 will boost grain and oilseed supplies and pressure prices going into 2015, which should bode well for milk production and may eventually provide some relief to food manufacturers who use dairy ingredients.
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