IDFA: Past dairy market behavior no longer predictor for future

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Why aren’t dairy market prices behaving like they "always have in the past"? According to Bob Yonkers, IDFA vice president and chief economist, the dairy market environment has changed significantly just in the past few years, making U.S. dairy markets of today, and likely in the future, very different as a result.

He offered these examples. The U.S. dairy industry has been used to seeing price declines for most manufactured dairy products after the holiday/football seasons end. When the industry depended largely on the domestic market, that was not an unreasonable expectation. But today the industry is exporting more than 15% of U.S. farm milk solids. While traditional domestic market factors will continue to play roles, global market indicators are increasingly important and cannot be ignored.

For most of the past year, reports out of China have indicated problems with that country’s domestic farm milk sector due to industry restructuring driven by food safety considerations. In addition, China’s demand for livestock products has grown for several decades, and dairy has been a big part of that growth, both for food and as feed for other livestock. Demand for U.S. dairy exports, both directly into China and also into other regions of the world, was the major factor keeping U.S. domestic dairy market prices from making the expected downturn after the holidays.

Also, Yonkers said it’s important not to limit the search for global market indicators to only those which have played significant roles in the past. Take a look at these market developments. Since the start of its production season last fall, New Zealand milk production is up significantly over last year. In addition, much of Western Europe is experiencing a mild winter and milk production is up there. In Australia, however, heat and drought have that country’s milk production running three percent below last year; much of Eastern Europe and Russia are seeing reduced milk volumes also. In the United States, milk production growth has been slow and dairy demand has remained strong in spite of high wholesale dairy prices.

Another frequently heard statement is that when U.S. wholesale market prices reach levels seen recently, demand destruction will soon follow. However, comparing what happened in the past – when the CME cheese price rose above $2.00/lb. – to today is no longer as relevant.

Since 2007, global food inflation has driven up the cost of all agricultural commodities and the world is adjusting to higher food prices. In the past when corn averaged $2.25/bushel, rarely reaching the $4 level, and soybeans hovered around $6/bushel and $10 was unusually high, the $2.00/lb. wholesale cheese price did seem high to end users. But today, and into the future, according to most baseline forecasts, $4 corn and $10 soybeans are the new normal.

Yonkers said it’s clear now that past market behavior will be no predictor of current or future market behavior for the U.S. dairy industry.

 

Milk Procurement Workshop planned

To help dairy industry professionals understand milk pricing both inside and outside the Federal Milk Marketing Order System, IDFA is hosting its annual Milk Procurement Workshop.

Yonkers will lead a classroom-style educational session, March 19-20, 2014 at the Embassy Suites Hotel in Rosemont, Ill. 

"When you have a better understanding of how government regulations cause milk prices to fluctuate and the challenges that the industry faces, you have knowledge you can use to improve your company’s bottom line," said Yonkers.

IDFA's Milk Procurement Workshop provides an overview of dairy industry trends, policy and pricing basics with a focus on understanding milk price regulation. Milk processors, cheese makers, frozen dessert marketers, butter manufacturers, nonfat dry milk manufacturers and other dairy industry professionals are welcome to attend.

Although most of the workshop attendees are first-timers who are new to the dairy industry, Yonkers encourages any dairy industry professional to attend, whether your goal is to refresh your knowledge or to help educate your colleagues. The course will be a lecture-format with class exercises; Yonkers emphasizes that there will be no homework and calculators will be provided for in-class activities. "During the workshop, participants are welcome to work with their peers to find the answers to the exercises; in fact, collaboration is encouraged," said Yonkers.

To register, visit IDFA’s website or contact Maria Velasco, assistant for meetings and educational services, at mvelasco@idfa.org or 202-220-3524.  For more information on milk procurement, contact Yonkers at byonkers@idfa.org.


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