Lately, news reports have been full of the impact of (relatively) higher milk prices on consumer wallets. For instance, according to the Gannett News Service earlier this week, “A rebound in milk prices has pushed up costs for a range of dairy foods. Wholesale cheddar cheese prices are up about 25 percent from the end of 2010, an increase comparable with the 23 percent rise in the price of crude oil.”
A new report, “Why Have Food Commodity Prices Risen Again?” released by USDA this week also examines the recent significant increase in food commodity prices, which have risen 60 percent since June 2010 due to a wide variety of factors. The report cites influences like global population growth, increased world per capita consumption of animal products, rising world per capita income, rising energy prices, depreciation of the U.S. dollar and slower growth in agricultural productivity.
All of this leads to the question, how long can the dairy market sustain itself at current prices?
It’s important to remember that there are two things going on in the dairy market right now, notes Mark Stephenson, director of the University of Wisconsin’s Center for Dairy Profitability. “First there are the supply-chain issues,” he says. “These pertain to the higher cost of producing milk, like higher feed prices.”
On the other hand, he says, demand remains strong, thanks in large part to a weak U.S. dollar. “The export markets are surprisingly strong, with good demand from China and India and, to some extent, oil-exporting countries offering new opportunities,” says Stephenson. “Even with New Zealand’s very good milk production year, world market prices remain high.”
Domestically, dairy product prices are somewhat inelastic, meaning that when prices exceed consumer comfort levels, people do cut back on dairy purchases. However, it’s also key to note that a good deal of dairy products, especially products like cheese, are sold through other channels including food service, restaurants and so on, which gives consumers less opportunity to reduce consumption.
Meanwhile, although available milk supplies in the upper Midwest are tighter than normal right now, overall milk production and cheese inventories in general appear to be adequate and not entirely representative of the high-priced — albeit stable — Chicago cheese price, explains Dave Kurzawski, dairy analyst with FC Stone/Downes-O’Neill in Chicago.
There is an important distinction here as it is really only a narrow slice of the overall dairy pie that prices cheese and subsequently Class III milk, he adds.
“‘Fresh’ cheese, that 4 -to 30-day-old product that can change hands in Chicago, has been tighter than expected here in June and until that frees up, prices can stay aloft longer than most would expect,” Kurzawski says. “That said, we’ve been above $2 per pound since June 6 and as price increases start to get passed along, we expect that demand will drop precipitously.”
Therefore, the ultimate answer to the question of how long higher dairy prices will stick around remains unknown.
The best advice remains to adhere to your marketing plan. And don’t try to out-guess the market.