November 1, 2011
US dairy prices decrease
US dairy prices are decreasing, pummelled by a surge in output although consumers' cheese and milk consumption decrease.
However, in order to take advantage of fat margins, dairy farmers responded to a months-long rally in prices by raising output. Producers in other parts of the world followed, helped by ideal temperatures for cows to make milk. Yet prices, which set record highs in midsummer, softened consumer demand. Growth in cheese and butter demand stumbled, while milk sales have been losing ground for years as people drink less of it.
Futures prices at the Chicago Mercantile Exchange for Class III milk, which is used to make cheese, have dipped more than 17% from an August high, to US$0.18 a pound. Prices for later-dated contracts already are lower, closer to US$0.165 a pound.
Dairy demand softened as supermarkets passed on higher milk prices. Retail milk sales are down 3-4% through the first eight months of the year, while cheese and butter sales fell 1.5% and 2.5%, respectively, over the same period, said analyst.
Sales to restaurants and food-service companies also were off for cheese and milk. Butter sales have gained slightly, but Dryer doesn't expect that will last.
Still, production has been rising. US milk output is up 1.7% in September compared with a year ago, according to the USDA. Production around the world is up, as well, with output in New Zealand, one of the world's largest exporters, rising roughly 12% from a year ago.
Fuelling increased production in the US are soaring beef prices, which give dairy farmers an incentive to sell their older cows for meat. Those animals are replaced by younger cows that tend to produce more milk.
The speed at which production responds to falling prices could depend on how banks lending to the dairy industry respond. Many US farms are still recovering from the last downturn in 2009 that was sparked by a surge in production just as the economy fell into a deep recession.
Banks, which helped farmers survive that sharp drop, could show less patience this time around, cutting off credit lines and forcing unprofitable dairies out of business, said John Wilson, senior vice president of Dairy Farmers of America, the nation's largest dairy cooperative.
Wilson said the financial community is not going to tolerate poor margins as long they did in 2009.
The dairy industry appears increasingly susceptible to booms and busts, in part because of the volatile cost of animal feed. As hay, corn and alfalfa costs climb, margins for milk producers can quickly shrink. Some dairy farmers protect themselves by growing their own feed, but they can face rising input costs for seed and fertiliser.
David Scheevel, a Minnesota producer who raises 120 cows and grows about half his feed needs, said his farm is currently operating at slightly better than break-even as prices fall. Scheevel, board chairman for Foremost Farms, a producer co-op, remains "cautiously optimistic" the pullback in prices now won't be a repeat of the prolonged slump seen in 2009.