April 2, 2014

 

 

While the average farm will see a 21% drop in net-cash income, led by declines for corn, wheat and soy, US dairy farmers will earn 28% more at US$334,100, the USDA predicts.

 

Prices have never been higher, feed costs are down, and output is headed for an all-time high as exports surge to buyers from Mexico to China.

 

Milk futures in Chicago are up 23% this year and cheddar cheese gained 19%, with both reaching records last month. The higher prices are eroding profit margins for domestic purchases including dairy processor Dean Foods Co. (DF), sandwich chain owner Potbelly Corp., and Annie's Inc., a maker of organic macaroni and cheese.

 

While the USDA expects domestic milk output to rise for a fifth straight year, up 2.2% to 205.7 billion pounds (93.1 million tonnes), exports now account for 15.5% of sales, compared with 5% a decade ago, according to the US Dairy Export Council, an industry group based in Arlington, Virginia.

 

Global economic growth is expanding the middle class from Asia to South America, boosting demand for dairy products including cheese and processed foods containing milk. US dairy exports reached 162,999 tonnes in January, up 19% from a year earlier, while the value rose 35% to US$583.7 million, council data show. Cheese shipments jumped 46% to 32,118 tonnes, with a 38% increase to Mexico, the biggest buyer of US dairy products, and a doubling to China.

 

Demand is expanding in China but Chinese dairies have been unable to keep pace with the rising demand.

 

Class III milk futures, which track a variety used to make cheese, are up 23% this year on the Chicago Mercantile Exchange, after touching a record US$24.15 per 100 pounds on March 24. That same day, a 40-pound block of cheddar reached US$2.4325 a pound, the most since data begins in 1997. The Standard & Poor's GSCI Spot Index of 24 commodities rallied 2.6% in the first quarter, while the MSCI All-Country World Index of equities advanced 0.6%. The Bloomberg Treasury Bond Index gained 1.7%.

 

Dairy costs tracked by the UN are the highest since the data began in 1994, after climbing 9.8% in the three months through February, outpacing the 1.2% gain for all foods.

 

Rising output may overwhelm demand. New Zealand, the largest dairy exporter, expects a 4.5% rebound in production in the year ended May 31 after the most widespread drought in three decades. EU production will grow 2.6% in the first six months of the year, according to Rabobank International.

 

Fonterra Cooperative Group Ltd., the world's largest shipper of dairy products, said it will boost capacity to process more milk into powder, which is the primary form of dairy exports. The Auckland, New Zealand-based company "processed as much of this milk into the higher-returning milk-powder streams as we could," Chief Executive Officer Theo Spierings said in a statement.

 

Production unexpectedly rose in California, where drought conditions have led to water shortages and higher feed costs as pastures dried up. The state's 5.3% increase in February to 3.4 billion pounds was second only to the 6% gain in Colorado.

 

While exports are rising, domestic demand is shrinking. Per-capita consumption of fluid milk in the US has been dropping for at least the past four decades, down 25% since 1975, according to the USDA.

 

Prices have already begun to retreat. The weighted average price of nine products traded at the GlobalDairyTrade, which serves as a worldwide benchmark, dropped 5.2% to US$4,563 a tonne.

 

Output may begin to slide in California, where 95% of the state was rated in severe to exceptional drought as of March 25, according to the US Drought Monitor.

 

So far, demand for dairy products remains strong. Demand from overseas is forecast by the USDA to boost industry sales by 7% this year to a record US$43.1 billion.