Dairy Market Update: January 2005

Many in the dairy industry cannot remember a time when U.S. skim milk solids, largely in the form of nonfat dry milk, were exported in any significant amounts without a subsidy from the U.S. government. That is changing as you read this — for the first time in recent memory, the world price for nonfat dry milk has risen above the U.S. wholesale price. This is having an impact on the nation's domestic markets.

In recent weeks, the wholesale price for nonfat dry milk reported in the U.S. Department of Agriculture's (USDA) weekly Dairy Products Prices report has moved up steadily, from 86 cents per pound in late November to nearly 90 cents for the week ending January 22 (the most recent data available). The last time that this wholesale price moved up more than three cents over a two-month period was in 1998.

This increase has affected more than just the nonfat dry milk market. In recent weeks, USDA's Dairy Market News reports that tanker loads of condensed skim milk are in demand, while loads of cream are plentiful. This is a significant change from the past few years, when the supply/demand for those products were generally reversed.

Because of the higher world prices, U.S. nonfat milk is being exported more often without being subsidized. In fact, the most recent U.S. subsidies under the Dairy Export Incentive Program (DEIP) were awarded in January 2004. As reported earlier this month in News Update, there have been no DEIP awards since the start of the new program year on July 1, 2004. Increased exports, coupled with sluggish growth in U.S. farm milk production (which USDA reports grew only 0.7% in December 2004), are the primary reasons for the tightening of the U.S. skim solids market.

The chart below shows how unusual the current price comparison between world and U.S. market prices is, from a historical standpoint. In the early 1990s, USDA, under the Dairy Price Support Program (DPSP), purchased large quantities of butter and relatively little nonfat dry milk. From 1990 to 1996, USDA followed a policy of adjusting the relative purchase prices for butter and nonfat dry milk under the DPSP, lowering the purchase price for butter to limit government budget outlays and raising the purchase price for nonfat dry milk to maintain the farm level milk price required under the Farm Bill.

However, the U.S. marketplace began to change in the mid-1990s, as the demand for butterfat grew faster than the demand for skim milk solids. As a result, USDA stopped buying butter under the DPSP in 1995, but USDA purchases of nonfat dry milk increased dramatically, from less than six million pounds in FY1996 to more than 300 million pounds in each of the past five fiscal years. From 1996 through 2001, USDA did not change the relative purchase prices for butter and nonfat dry milk, despite this shift in the marketplace. However, since 2001, USDA has twice reduced the purchase price for nonfat dry milk, returning it to its 1990 level ($0.80 per pound).

Other factors that will likely impact the world market for nonfat dry milk include agricultural policy reforms of the European Union and the World Trade Organization's Doha Round negotiations, which aim to eliminate export subsidies. Given these influences, we could experience other times when the world market prices for dairy products rise above U.S. domestic wholesale market prices in the coming years.

Posted January 31, 2005