March 16, 2011

Global milk price rally soon to end on output boost

The worldwide milk rally that sent prices up 48% this year, more than any agricultural commodity, may be ending as farmers respond with record production.

Output in the US, the world's second-largest producer, may rise 1.7% to 196 billion pounds in 2011, enough to fill about 34,500 Olympic-sized pools, USDA estimates. Demand will weaken as restaurants cut promotions and grocers raise prices, said INTL FCStone Inc., a New York-based broker. Futures may drop 14% to US$16.86 per 100 pounds by December 31, a Bloomberg survey of 10 analysts showed.

Dairies are missing out on profits from milk's biggest rally since at least 1996 as the surge in grain that drove world food prices to a record, contributing to protests in northern Africa and the Middle East, also boosted the cost of feeding cows. While income for grain and cotton growers will rise more than 20% this year, earnings at dairies may drop 13%, the government estimates.

"Grain farmers are having some of the best years they've had in a long time profit-wise, but you couldn't say that for dairy. Dairy facilities are running at the maximum. With a little softening in demand, prices are going to come down," said Bob Cropp, an economist at the University of Wisconsin in Madison who has been studying the industry since 1966.

Milk futures on the Chicago Mercantile Exchange fell 0.2% Monday (Mar 14) to US$19.61 in Chicago, after reaching a 32-month high of US$19.65 on March 11. Prices are up 53% from a year earlier as importers from Mexico to China increased buying and the rebounding US economy bolstered domestic demand.

Milk's 2011 rally has exceeded those of all agricultural futures traded in New York and Chicago including cotton, which surged 42% and reached a record last week. The Standard & Poor's GSCI Index of 24 commodities advanced 11%, and the S&P 500 Index of stocks rose 3.7%. As of March 10, Treasuries gained 0.1% this year, a Bank of America Merrill Lynch index shows.

Traders are already anticipating a drop, with the December contract at a 16% discount to the one that expires this month. Shawn Hackett, the president of Hackett Financial Advisers, who correctly projected in October that milk would surge, now says futures for Class III milk, used to make cheese, may fall as low as US$15 amid higher output in Australia and New Zealand, the largest exporter.

Riots have erupted from Bahrain to Morocco, in part fueled by food costs the UN says reached a record last month. Protests already toppled leaders in Egypt and Tunisia. The projected drop in milk prices will do little to relieve the surge in food inflation that the World Bank says helped drive 44 million more people into extreme poverty since June.