U.S.D.A. dry milk stocks grow

by Ron Sterk
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The market conditions that existed a couple of years ago to drive prices for many commodities to record levels may be forming in the market for dry dairy products, but in the opposite direction.

As milk production continues to increase, albeit at a slower rate, and demand wanes, prices for all dry dairy products have plummeted from highs set in 2007. Partially as a result of weak prices, but also part of the cause, more than 79 million lbs, or two-thirds of a month’s production, of nonfat dry milk have been purchased by the Commodity Credit Corp. of the U.S. Department of Agriculture since Oct. 1 at the 80c-a-lb support level.

It is the first time in two years nonfat dry milk has been owned by the C.C.C. All of the sales to the government have been in the western region of the United States.

While the government price acts as a floor for nonfat dry milk prices, and for other dry products that may be substituted, it also has been a "target" cited by buyers as a price above which they are reluctant to pay.

"A few end users are opting to purchase all 2009 N.D.M. needs now at a known price rather than spread purchases throughout the year at unknown prices," the U.S.D.A. said last week. "Buyers are anxious to lock in current price levels to help them establish input costs."

Knowing prices in effect won’t fall below the 80c support price, sellers have been reluctant to contract at current levels since the only direction the market can go is up, or at worst hold steady.

"Processors are interested in keeping the door open on ways to capture some part of any market upside that may develop," the U.S.D.A. said.

Low- and medium-heat nonfat dry milk prices were quoted by the U.S.D.A. last week at 80@93c a lb nationwide, with quotes mostly 86@92c in the Central and East and 82@85c in the West. Prices dropped more than 40% since early August but have held relatively steady since early November, albeit at the lowest levels since July 2006.

Meanwhile, nonfat dry milk production remains strong and supplies large.

Edible nonfat dry milk production in October totaled 121 million lbs, up 21% from October 2007 and the largest monthly year-over-year increase since February, the U.S.D.A. said in its latest Milk Products report. Production in the first 10 months of 2008 totaled 1,227 million lbs, up 13% from the same period last year.

Manufacturers’ stocks of edible nonfat dry milk at the end of October were 145 million lbs, 16% more than a year earlier. Combined with the growing C.C.C. inventory, stocks now equal to about two months of production.

In its latest Livestock, Dairy and Poultry Outlook, the U.S.D.A. forecast nonfat dry milk prices would average in a range of 90@97c a lb in 2009, with most strength in the latter half of the year. That compares with an average price near $1.23½c a lb in 2008, with the average held up by prices at or above $1.30 in the first three quarters of the year. Fourth-quarter prices were expected to range from 92½@95½c a lb. In 2007, the average price of nonfat dry milk was about $1.71 a lb.

Milk production will continue to increase at a slower rate in 2009, the U.S.D.A. predicted, but demand will weaken due to dreary economic conditions and larger supplies internationally.

"Milk production will likely increase about 1% next year, reaching 191.5 billion lbs in 2009," the U.S.D.A. said. "The projected rate of growth is well below rates of increase in recent years." Production increased 2.3% from a year earlier in 2008 and was up 2.1% in 2007 from 2006.

Declining export sales, which largely drove prices of several dry milk products to record highs in 2007, will limit outlets for U.S. products and further pressure prices in 2009. Foreign demand had been driven by a historically weak U.S. dollar and low milk production in Europe and Oceania, the two primary competitors for foreign sales.

"Export demand is expected to weaken through the fall quarter and into 2009," the U.S.D.A. said. "New Zealand and Australian milk production is expected to climb above year earlier levels in 2009. Increased supply from major competitors and a weakening global economy will curb exports next year."

Also competing with domestic production will be added volume as the C.C.C. resells its stocks of nonfat dry milk in coming months.

This article can also be found in the digital edition of Dairy Business News, December 9, 2008, starting on Page 14. Click here to search that archive.

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