Dairy Market Update: A Period of Adjustment

Just three short months ago, at the end of the first calendar quarter of 2004, dairy markets were firmly moving into record high price territory. The second quarter was a period of adjustment, as trends in milk production and dairy product demand responded to those high prices. In the past two months we've seen prices in the dairy markets fall. And USDA's most recent forecast of the annual average milk price for 2004 was published June 29, with the all-milk price paid to farmers forecast to average $16.40 per hundredweight.

Clearly, the year-long trend of declining milk production seems to be coming to an end. Back in the first quarter, milk production was down nearly 2% from a year ago (adjusted for the extra day in this leap year). This trend began to change in April, with production down only 0.8%, and continued in May, when production was nearly the same as last year (-0.1%). The expectation of lower milk production farther into 2004 was a key factor driving dairy markets this past spring. The markets eagerly await USDA's publication of milk production data for June in mid-July, as well as weather conditions this summer in key milk-producing regions of the country.

Meanwhile, higher prices for milk and dairy products showed up in supermarkets this spring. According to the U.S. Bureau of Labor Statistics, the all-city average retail price of a gallon of whole milk jumped to $3.374 in May from $2.906 in April (and compared to $2.685 in May 2003). The pattern was similar for other dairy products, with a pound of butter at $3.758 in May (versus $3.353 in April and only $2.726 in May 2003) and a pound of Cheddar cheese at $4.406 in May (versus $4.134 in April and only $3.806 in May 2003). While data on commercial sales of these products have not yet been published by USDA, numerous anecdotal reports suggest that sales of these products fell in May.

As a result of these supply and demand conditions, prices in the dairy markets have fallen over the past two months. At the Chicago Mercantile Exchange (CME), the wholesale price of Cheddar cheese in 40-lb blocks fell from its peak of $2.20 per pound in late April to $1.41 on July 2. The wholesale price of butter at the CME reached its peak of $2.36 in late March, and stood at $1.895 on July 2. The monthly average wholesale prices for these dairy products are used by USDA to calculate the minimum prices processors regulated by Federal Milk Marketing Orders must pay dairy producers.

The minimum price for milk used to make cheese in June fell to $17.68 per hundredweight of milk from the record highs of $19.66 in April and $20.58 in May. Meanwhile, the USDA announced Class I base price for farm milk used in fluid dairy products during the month of July is $17.95, again down from the record highs of $19.65 in May and $21.13 in June. (For a more detailed explanation of how USDA calculates these prices, click here.)

Posted July 6, 2004