Market Update: December 2004

The dairy market headlines for the past few weeks have focused on the dramatic decline in the wholesale dairy product prices at the Chicago Mercantile Exchange (CME). Due to the federal order formulas, these price changes will push downward the minimum prices that the federal government requires processors to pay to farmers. When this situation has occurred previously, it has often been accompanied by reports bemoaning the "low milk prices" that result.

However, it is crucial for the industry to keep this recent change in perspective. First of all, farm milk prices in 2004 will average the highest on record. The U.S. Department of Agriculture's (USDA) most recent forecast is for the all-milk price paid to farmers to average $16.00 this year. To put this in context, farm milk prices have averaged $13.57 in the previous 10 years, ranging from the previous record high of $15.43 in 1998 to a low of $12.11 in 2002.

In addition, as seen in the chart below, farm milk prices on average have been trending upward for the past 15 years. The five highest milk prices on record have occurred in the past nine years. While it is true that farm milk prices were lower than average in 2002 and 2003, the federal government has provided a supplemental direct payment under the Milk Income Loss Contract (MILC) program since December 2001 to dairy farmers when market milk prices are low. Since MILC's inception, the government has paid out more than $1.8 billion to dairy farmers, mostly in 2002 (when the payment averaged $1.21 per cwt of eligible milk marketed) and 2003 (when the payment averaged $1.09). This program even made payments to dairy farmers (averaging $0.85) in the first three months of 2004, the year of the highest milk prices on record.

Finally, the volatility in the wholesale dairy product markets seen this year is not much different from that seen in past years. For example, from 1999 though 2003, the CME price of butter in the fourth quarter was very variable, with an average range of more than 40 cents from the high trading day to the low trading. Through Friday December 17, the range seen this year is a little more than that average — 56 cents — but still far below the year with the greatest fourth-quarter volatility (72.5 cents in 2000).

What is different this year is the average wholesale price of butter at the CME: $1.79 so far in this fourth quarter, compared with an average of $1.21 in the previous five years.

In summary, the dairy market is simply adjusting to the ups and downs that 2004 has brought.

Posted December 20, 2004