Market Watch Diary: Dairy Demand ‘Resilient’

World demand for dairy products remains strong, despite higher prices.

Strong domestic and international demand helped push the cheese price above $2 and the butter price very nearly to $2 in early autumn.

Now, as I’m writing this column in mid-October, both prices are in retreat. These prices simply went too high, too fast and too early.

End users found themselves in one of two situations. Either they had spent the summer building some inventory at attractive prices or they viewed the price spike with disbelief and put away their order books, waiting for prices to retrace.

Not to worry. Remember that dairy demand is resilient—but first take a look at supply. Market analysts at the U.S. Dairy Export Council (USDEC) just delivered their outlook. In a nutshell, worldwide milk production will be higher and demand will be higher during 2013 and beyond.

- In New Zealand, pasture conditions are ideal, milk producers are starting to use more supplemental feed and production per cow is increasing. Total production will be up 4%.

- Ditto in Australia for water and feed, plus a big inventory of replacement heifers. Production will be up 5%.

- South American milk producers have some attractive options, namely row crops and beef. That said, they will still make 5% more milk; most of it will be consumed in South America.

- In the European Union, where production quotas still prevail, USDEC says production could increase by 1%. Domestic demand will be slack, so more EU dairy products will enter the world market.

- Here at home, milk production will be largely unchanged from 2012.

If the USDEC crystal ball is correct, an additional 6 billion pounds of milk will arrive on the world market during 2013. This is equivalent to a 3% increase in U.S. milk production.

For perspective, worldwide milk usage increased by 7.2 billion pounds in 2010 and by another 7.5 billion pounds in 2011.

China is the poster child for worldwide demand, but U.S. exporters are also finding healthy appetites in numerous Southeast Asian countries, the Middle East and Northern Africa, and Mexico.

USDEC analysts offered insight on several markets that went beyond the television headlines. For example, China is quietly abandoning its one-child-per-family policy. This single change promises to create a huge market for milk-based infant formula.

Meanwhile, buyer-held inventories are being reduced. Demand is resilient. Buyers here and abroad will likely be back.

The price of whole milk powder is a benchmark for international trade, and that price has hovered around $3,000 per ton for much of this year. As noted, buyers will be back, and USDEC predicts that whole milk powder will move to somewhere between $3,800 and $4,200 per ton. This translates into a U.S. milk price of $20 to $21 per cwt.