Dairy Market Update: August 2005

After two lackluster years, U.S. milk production has surged in 2005 to date. The U.S. Department of Agriculture (USDA) reports that through July, milk production in the United States is up 3.3% after adjusting for an extra leap day in 2004. This follows a minute decline of 0.03% for all of 2004 and only a 0.2% increase in 2003 over 2002. For the most recent three months (May - July), U.S. milk production is up a substantial 4.5%.

Interestingly, demand growth is also booming, thanks in large part to overseas demand for U.S. skim milk solids. For the first six months of 2005, USDA estimates that commercial disappearance of skim solids ran 5.3% ahead of the same period in 2004 (after adjusting for leap year). That is due in large part to a jump in exports of nonfat dry milk. Specifically, 2005 exports increased by nearly 120% over last year, from 169 million pounds in the first half of 2004 to nearly 370 million pounds in the first half of this year.

USDA also reports that the price of skim milk powder in Northern Europe is the highest in at least 10 years, with July's average price reported to be $1.06 per pound. This is only the fourth time in 10 years that the average monthly price for skim milk powder in Europe has been above $1.00 per pound.

As recently as May 2001, the U.S. government purchase price for nonfat dry milk under the federal Dairy Price Support Program was above $1.00. Had USDA not had the foresight to lower the nonfat dry milk purchase price — known as "adjusting the tilt" — twice in the past five years, the United States would likely not be a player in the world dairy market today, and U.S. farm milk prices would subsequently be much lower.

Farm milk prices so far in 2005 are about $1.00 lower than in the first half of 2004, averaging $15.20 for January through July. However, this is still far above the long-run average for farm milk prices, which averaged $13.57 for the 10-year period 1994-2003, $12.88 during 1984-1993, and only $11.31 in 1974-1983.

In addition to powder exports, demand growth for milkfat domestically is also strong. USDA estimates that commercial disappearance of milkfat was up 1.6% in the first half of 2005 compared to the same period in 2004 (adjusted for leap year). Much of this increase in domestic demand is attributable to cheese, with commercial disappearance of other-than-American cheese up over 3% so far in 2005.

Looking at all of this data, the message seems clear: Combining a more market-oriented administration of the Dairy Price Support Program with aggressive efforts to increase demand are the best way to ensure the future growth of the U.S. dairy industry.

Posted August 29, 2005