Dairy product prices expected to moderate as supply increases

by Ron Sterk
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Record high milk and dairy product prices have curbed export and domestic demand slightly and encouraged increased milk production, resulting in lower prices in recent weeks, but ongoing export demand and a weak dollar are expected to limit price declines.

"Supply constraints worldwide made 2007 a record year for milk prices, and 2008 will be the second highest," said Bill Brooks, dairy economist for Chicago-based Downes-O’Neill brokerage.

Through July U.S. dairy product exports equaled about 11% of milk production, more than twice the amount exported five years ago, according to the International Dairy Foods Association. Export demand has been driven by milk shortages in Europe and Oceania, both typically exporters, as well as by record weakness in the value of the U.S. dollar.

Export demand added about 30@50c a lb, or more, to nonfat dry milk (N.D.M.) prices, and as much as $5 a cwt to milk prices in the U.S., Mr. Brooks estimated.

"We should see strong exports as we go forward, but not maintain the pace of the past 12 months," Mr. Brooks said. Some importing countries are looking to grow their dairy industries, while traditional exporters, like Australia, which has been hit by two years of drought, should rebound, he said.

Relief, at least from the supply side, has begun to arrive. Monthly milk production has increased more than 3% from the same month a year ago for the past three months (July-September), compared with monthly increases of less than 2% in more than a year preceding, according to U.S.D.A. milk production data. In its latest Livestock, Dairy and Poultry Outlook report, the U.S.D.A. forecast 2007 milk production at 185.4 billion lbs, up 2% from 2006, and 2008 production at 190.2 billion lbs, up 2.6% from 2007. The increase was the result of farmers adding cows to herds and slightly greater production per cow, the U.S.D.A. said. Despite high feed costs and high replacement heifer prices, "for most producers, having more cows has been profitable," the U.S.D.A. said.

"Increased milk production is expected for the balance of this year and into 2008," the U.S.D.A. said in its latest outlook report. "The increase will pressure prices. Higher retail prices for fluid milk have dampened consumption. Consequently, more milk will be allocated to manufacturing uses."

However, limited supplies and high prices for hay and forage could ultimately limit herd expansion, Mr. Brooks noted.

Prices for most dry products appear to have peaked in the second or third quarter of this year. Although much focus has been on N.D.F. prices, dry whey actually led the price run-up as well as the more recent decline, Mr. Brooks said.

Dry whey prices peaked at 76@82c a lb in mid-April and have since declined to 37@42c, about even with 38@40c a year ago, according to the U.S.D.A. Prices for most other dry products peaked in July, but unlike whey, most remain well above year-ago levels.

Mr. Brooks expects dry whey prices to average around 39½c a lb in the fourth quarter and drop only slightly to 37½c in the first quarter of 2008 as demand typically eases in the spring.

But N.D.F. prices could come under more pressure, possibly dropping to an average of $1.75½ a lb in the first quarter of calendar 2008 from $1.98 in the fourth, for low- to medium-heat in the West. Pressure would come from increased production by Southern Hemisphere producers, he said, although so far it has been slow to build.

Dry lactose prices should average 75½c a lb nationally in the fourth quarter and drop about 5c in the first quarter due to the recent decline in whey prices, Mr. Brooks predicted. Dry buttermilk prices could drop more sharply, however, from about $1.92¼ a lb in the fourth quarter to an average of $1.72 in the first, on spillover pressure from N.D.F., he said.

"Production of dry products will likely remain above year-earlier levels and continue to pressure prices for the remainder of 2007 and into 2008," the U.S.D.A. concurred.

But price gains still are being passed on to consumers. Two dairy items led third-quarter price increases in the American Farm Bureau Federation’s national survey of 16 basic food items. Regular whole milk at $3.94 a gallon showed the largest quarter-to-quarter increase of 48c, the survey showed, while cheddar cheese, at $4.07 a lb, had the second-largest increase from the second quarter at 35c. Milk was up 91c from the third quarter of 2006 while cheddar cheese was up 55c.

Milk production and prices also could be affected by "unknowns" related to demand, changes in the dairy program included in the new farm bill that is still under debate, costs related to renewable fuels and weather, Mr. Brooks said.

This article can also be found in the digital edition of Food Business News, October 30, 2007, starting on Page 32. Click here to search that archive.

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