Dairy Market Update: February 2005

The most important news for U.S. dairy markets in the near term is that U.S. milk production continues its sluggish pace of growth. In the longer term, the U.S. Department of Agriculture's (USDA) Agricultural Baseline Projections, released last week, show steady increases in U.S. farm milk prices for the next 10 years.

USDA's estimate for total U.S. milk production in January 2005 was 0.9% higher than that reported for last January. This is the third consecutive month with less than 1% growth, after a year with the highest farm milk prices on record. What's more, milk production in January 2005 was 0.3% below where it was two years ago, in January 2003. At USDA's annual Agricultural Outlook Forum last week, USDA Chief Economist Keith Collins predicted that milk prices received by farmers in 2005 would be the fourth highest on record.

Concerns about the lethargic growth in milk production is being reflected in futures contracts traded at the Chicago Mercantile Exchange, where the 2005 simple average of the monthly Class III milk futures contracts remains about $14.00, which if realized would be the third highest annual Class III price on record.

While the U.S. dairy industry tends to look at averages based on a calendar year, USDA's long-term projections are based on the federal government's fiscal year, which runs from October 1 to September 30. After a 2003-04 fiscal year record average milk price of $15.63, USDA's baseline projection for a 2004-05 average is $14.10. For 2005-06, it climbs to $14.75. It is important to note that this baseline, like most baselines used by policymakers, assumes that current federal policies are continued for the entire baseline period; therefore, the Federal Milk Marketing Order pricing formulas and the Dairy Price Support Program are applied unchanged in this model. Under this assumption, the USDA baseline price increases more than two dollars over the next decade, to $16.90 in fiscal year 2014-15.

For the near term, dairy market analysts will be focused on USDA's monthly estimate of milk production. For the coming policy debates in Washington, D.C. — starting with the coming year's budget and leading up to and through the 2007 Farm Bill — the baseline projections by USDA and others are important to decisionmakers on Capitol Hill who are looking to find a balance between budgetary restraint and farm support.

To review USDA's complete baseline projections announced at the Agriculture Outlook Forum, click here.

Posted February 28, 2005