NMPF December Dairy Market Outlook

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U.S. milk prices rose through 2010, and the all-milk price is projected to average over $16.25/cwt. for the year, 27% higher than in 2009. Cheese prices rose and butter prices soared; but most milk and dairy product prices peaked in October, and are projected to fall through the winter. Based on futures prices, the May 2011 all-milk price is projected at $15.30; this price would have been profitable 10 years ago, when corn was $2/bu. and soymeal was $165/ton; but it is clearly below projected production costs.

Corn prices had settled into their new plateau of around $3.50/bu. for the 2009/10 marketing year; but they have risen through the fall, as policy-induced worldwide bio-fuels demand for grain, and grain-producing cropland, continues to grow and as weather concerns limit crop forecasts. Corn prices are projected to exceed $5.70/bu., soymeal futures promise up to $350/ton, and the all-milk price projects to average $15.65 in the first half of 2011. If these milk and feed projections are right, dairy farmers will face the second-worst milk-feed price margins over the last decade (— better only than the ruinous margins of mid-2009).

The question, then, is how fast will supply respond to these margins, considering how fast production is growing now? History says: slowly. We say: even slower. In the past, small, marginal producers were driven out of business when margins were too tight, and their production was cut out of the supply. Today, there are few such producers: most were driven out of business by the turmoil of the last few years. Most of those left are in two overlapping groups: 1) producers of all sizes who grow their own feed (including graziers) and who can cash flow on their combined crop/dairy operations, and 2) large producers whose debt can scare their bankers more than it scares them. It is hard to see a rapid supply response to the coming drop in milk-feed margins; so it is hard to see a faster correction of those margins than the modest recovery that the markets project for late summer 2011.

An early recovery is hard to see, that is, unless the developing drought in New Zealand takes hold and allows U.S. exports to continue their rapid growth through the spring. Projected growth of New Zealand milk production had promised to squeeze U.S. dairy products out of many market opportunities; but dry weather associated with La Niña now threatens that growth. Another factor will be the technical barriers to trade we face in many importing countries; this is rapidly becoming the most important trade issue U.S. exports face.

The Cooperatives Working Together (CWT) program could also be an important factor in this export push. In 2010, CWT has offered assistance for the export of 70 million lbs. of cheese and 33 million lbs. of butter and anhydrous milkfat, making a substantial contribution to this year’s export growth. If fully funded in 2011, this assistance would grow substantially.
 
Based on futures prices, Milk Income Loss Contract payments are projected for 20 months, beginning next January, and averaging 35¢/cwt. over that period. This is based on rising corn and soybean prices for all months, and despite higher milk price expectations for 2011 and early 2012.

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Source: National Milk Producers Federation



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