Why are dairy market prices not 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 probably 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 the industry is exporting more than 15 percent 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 that 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 during 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 3 percent below last year; much of Eastern Europe and Russia are seeing reduced milk volumes also.
In the U.S., 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 per lb., that 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 per bushel, rarely reaching the $4 level and soybeans hovered around $6 per bushel and $10 was unusually high, the $2.00 per lb. wholesale cheese price did seem high to end users.
But now, 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.