Use key to continued record prices: Will demand support dairy prices?

WASHINGTON – Milk supplies have been considerably below a year earlier, but will demand support continued record prices?

Wholesale prices of dairy products varied in late April and early May, according to the USDA’s Economic Research Service.

Net change generally was not much until butter and cheese prices dropped about 10 percent as mid-May neared.

Nonfat dry milk prices moved slightly higher.

Big unknown. With milk production likely to stay below a year earlier through most of 2004, the key to how long dairy prices stay high will be the strength of demand recovery, USDA economists said.

Restaurant demand came back in the first quarter after more than two years of sluggishness, joining the earlier recovery in retail and (to a lesser extent) food processor use.

Cheese, please. Cheese demand was so brisk that cheese production not only pulled very large amounts of milk from other uses, but apparently used so much nonfat dry milk in the vats that the seemingly endless surplus of skim solids virtually disappeared.

The core question for dairy markets in the coming months is how much of the recent cheese movement has actually been eaten.

Hedge buys. In extreme markets, buyers are understandably more concerned with what might happen than what is most likely to occur.

Precautionary buying for future needs can easily push prices beyond sustainable levels.

Summer outlook. If declines in milk production start to ease as expected, dairy product prices probably will slip this summer. Even so, farm milk prices probably will be a record in 2004, up as much as $4 per hundredweight from 2003.

On the other hand, prices could remain quite strong if final cheese use has actually absorbed most of the recent cheese movement.

Will it last. Such a surge in cheese demand has not occurred in a number of years although there are a number of precedents, the economists said.

Consumer incomes and economic growth have been strong, but the economy seems to contain enough scattered areas of weakness to forestall such a dramatic, sustained upswing in use.