Dairy Market Update: March 2005

As the first quarter of 2005 draws to a close, it is a good time to check out how the dairy markets are shaping up so far this year.

After growing at less than a 1% annual rate in recent months, U.S. farm milk production in February reportedly picked up significantly. Even with heavy rains that month in the largest milk production state of California, the U.S. Department of Agriculture (USDA) found that total milk production was 2.5% higher than in February 2004 (adjusted for leap year). While one month does not a trend make, it is important to note that this was the largest such year-over-year increase since October 2002.

Looking at demand, USDA's forecast for the first quarter of 2005 expects strong demand growth. (Published data on milk and dairy product demand lags production data considerably.) USDA expects commercial disappearance to increase 1.7% on a milkfat basis and more than 3% on a skim solids basis. USDA expects the increased demand throughout 2005 due to a strong U.S. economy and more consumer spending in restaurants, as well as increased exports of skim milk powder due to tight world market conditions. One piece of demand data that is available from USDA is that fluid milk product sales in January were up just 0.4% after adjusting for calendar composition, such as leap year and weekends this year versus the previous year.

Overall, prices in the wholesale dairy markets seem to agree with the demand picture painted by USDA. While prices have been below the record-highs seen in 2004, they have been well above the long-term average for this time of year. Historically, the period between late winter and early summer is a time to build stocks of manufactured dairy products due to the traditional lower prices; these inventories then typically supplement production later in the year when demand for all milk products usually outpaces supply. However, so far in 2005 the wholesale prices of cheese and butter have been at higher levels for this time of year, and the price for nonfat dry milk has surged more than 10 cents above the USDA purchase price under the federal Dairy Price Support Program because of world market demand.

At the Chicago Mercantile Exchange, milk futures contracts for the rest of 2005 indicate this could be the second highest farm milk price year on record, following the record high year of 2004. The two factors that could affect market outlooks are the rate of U.S. milk production growth in the coming months and actual demand data.

Posted March 28, 2005