Federal Orders
January 26, 2009
Dairy Market Update: Wholesale Prices Continue to Drop; Retail Levels Remain High
By Bob Yonkers, IDFA Chief Economist, Ph.D.
Wholesale dairy product prices continue to decline, following their precipitous drop in the last weeks and months of 2008 that ended a nearly two-year run at historically high levels. Retail dairy product price levels, however, remain high. Let's look at current price levels and the impacts of government price regulations.
In trading at the Chicago Mercantile Exchange last week, cheddar cheese in 40-pound blocks settled at $1.075 per pound. While this was below the Milk Price Support Program (MPSP) purchase price of $1.13 per pound, the U.S. Department of Agriculture has not yet purchased any cheese under this program. USDA has purchased nonfat dry milk (over 142 million pounds since October 1, 2008) under the MPSP at 80 cents per pound, as well as butter (1.5 million pounds since January 1, 2009) at the purchase price of $1.05 per pound.
However, the most recent data available from the U.S. Bureau of Labor Statistics indicate that while retail dairy product prices are lower than the all-time record highs set earlier last year, price levels remain high. For example, the U.S. city average retail price for a gallon of whole milk in December was $3.681, down 28 cents from the all-time record high of $3.961 set last July and 5 cents lower than the November average. The all-city average retail price for cheddar cheese per pound set a record in November 2008 of $5.097 and dropped nearly 15 cents in December to $4.952.
There can be many reasons for price movements, but one key observation is that wholesale dairy product prices at the end of January are not related to the retail prices reported for the entire month of December. For farm milk used in fluid dairy products, the government-set minimum price that processors were required to pay dairy producers for milk bought in December was based on the wholesale dairy product prices from early November. For cheddar cheese and many other manufactured dairy products, what was sold at retail to consumers in December was likely manufactured in November or earlier, using milk with a minimum price that also was set by the government.
Due to government regulation of minimum farm milk prices, either under the Federal Milk Marketing Order system or state price regulation, average farm milk prices also tend to lag the wholesale dairy product market prices. For example, federal order regulations require payment for farm milk bought in November to be paid in December, because the minimum price to be paid to farmers — the uniform, or blend, price — is not even announced by USDA until mid-December. Therefore, the reported all-milk price received by dairy farmers in December mostly consisted of payments for farm milk sold and priced in November.
Interestingly, the prices of dairy futures contracts at the CME for 2009 are for some contracts as much as 50% higher than current prices.
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