Dairy prices should rise through ’08

COLUMBUS – Despite last season’s financial woes, U.S. dairy producers have been enjoying historically high milk prices this year, driven mainly by an international demand for products that non-U.S. markets have been unable to fill.
Dairy prices normally average around $12 a hundredweight during this time of the year, but producers are seeing prices averaging close to $15 per hundredweight.
Above average. And over the next six to 12 months, according to the Chicago Mercantile Exchange futures market, prices are expected to run anywhere from $3.30 to $5 above typical monthly levels.
“Dairy prices at the farm have been higher than they’ve ever been before for this time of the year. We are seeing substantial premiums. It’s just amazing,” said Cameron Thraen, an Ohio State University Extension dairy marketing and policy specialist with the Department of Agricultural, Environmental, and Development Economics.
“The median price for May is $10.88 a hundredweight. It’s generally the lowest price of the year because production is the greatest, but with schools letting out, demand is the least.
“Currently, the futures market for the May contract is at $17.15 a hundredweight. In September or October, a time where prices are the highest, we would see no greater than $14 or $14.50 a hundredweight. Futures prices are at nearly $18 a hundredweight right now.”
Whey protein. Thraen said the high prices are the result of the United States stepping up as a major exporter of whey protein.
Dry whey exports from the United States are up 17 percent and whey protein concentrate exports have been up 74 percent since last year, with China, Canada, Mexico and South Korea as the major export destinations.
Whey normally accounts for 40 cents to 45 cents a hundredweight in a farmer’s milk check, but currently whey is accounting for as much as $3 of the final milk check.
“The world demand for whey protein has just exploded and the U.S. dairy industry finds itself in a really enviable position,” said Thraen.
“In the past, whey protein has been supplied by the European Union, Australia and New Zealand. But many changes have taken place to put the United States back in a market we threw away a decade ago.”
Foreign factors. The European Union has made changes to its agricultural policies that cut skim milk powder and whey production, no longer making the it a major supplier of these refined dairy products.
Australia continues to be plagued with a years-long drought that’s impacting the dairy industry region.
“A steady demand is also there because our dollar is weak right now. That’s good for folks who want to export,” said Thraen.
“But how long will the high prices last? According to the markets, it’s likely to spill well into 2008, and prices could go even higher.”
Producers are also enjoying higher butter and cheese prices. Cash cheese on the Chicago Mercantile Exchange is up to the high $1.60s a pound from $1.20 to $1.30 a pound just a few weeks ago.
Butter prices have risen from $1.20 to $1.47 a pound. And prices are expected to continue climbing.
So it may be smooth sailing for dairy producers for the next 12 to 14 months, but there are always wrinkles. And one issue facing producers is the high corn prices driven by a growing ethanol demand.
Ethanol. “Dairy producers are looking at that market in amazement. The question on everyone’s mind is, how much of these new-found farm prices will be eaten up by the cost of feeding?” said Thraen.
“Another factor is that corn planting is way behind this year. Plug that in with ethanol and corn prices could go even higher than they are now if we don’t have the corn to feed this ethanol industry sitting out there and ready to go.”
Though the future of corn prices is not immediately certain, one thing is: Consumers will see higher prices for milk, butter, cheese – even beef – at the grocery store.
“There’s no question that we will see higher consumer prices, but how much higher? A gallon of fluid milk could increase anywhere from 25 cents to 30 cents over a period of time,” said Thraen.
Beef prices. Even beef prices could increase because those in the agricultural industry relying on whey protein as a major feed input will have trouble competing with the international market.
The likely reaction, said Thraen, is to cut back on whey protein use, which will slow down beef in the market and raise livestock prices.
The good news for consumers is that higher on-farm milk prices will stimulate renewed growth in U.S. milk production. Increased milk supply will put a cap on farm prices and, after some lag, consumer prices will drop.
“But do not look for this to happen until well into 2008,” said Thraen.