Dairy Market Update: February 2006

You could characterize dairy markets as being the same as last month: Milk production continues to surge, and commercial demand appears sluggish at best. In the past month wholesale dairy product prices have fallen to levels not seen since 2003. According to the U.S. Department of Agriculture (USDA), this may not change anytime soon.

USDA reports that at least some of the recent dairy market price declines are due to market expectations for the coming year, noting that "Traders seem to anticipate large production increases and uncertain demand, making buyers reluctant to seek commitments for later in the year." (Click here).

USDA forecasts U.S. milk production will grow by 5 billion pounds this year, from 175.4 billion in 2005 to 180.4 in 2006. While USDA expects robust demand growth for milkfat in 2006, the outlook for skim milk solids is for demand growth to lag production growth.

USDA expects the farm milk price to average between $13.05 and $13.85 for this calendar year, down from last year's $15.15 per hundredweight.

Longer term, the new USDA baseline for dairy expects farm milk prices to recover about one dollar on average in 2007 to $14.55, and then remain between $14.45 and $14.85 through 2013. (Click here ) In particular, USDA notes the following dairy trends:

• Productivity gains are expected to boost milk output per cow and total milk production throughout the projections. Further development of large, specialized operations in most regions will be a significant contributor to these gains.

• Growth in milk output per cow is projected to slow in the baseline as gains are less easily boosted by simply increasing concentrate feeds.

• Milk cow numbers are expected to decline after 2006 at a relatively slow pace. Increasing specialization of dairy farms over time (and the associated less attractive salvage uses for dairy capital and other inputs) will make exit rates from milk production lower than in past decades.

• Commercial use is expected to increase slightly faster than the growth in population, reflecting slow growth in domestic demand for dairy products. Cheese and butter demand will benefit from greater consumption of prepared foods and increased away-from-home eating. USDA predicts per capita consumption of fluid milk will continue to decline slowly.

• Farm-level milk prices are expected to decline in 2006 due to relatively large production increases. Prices will then rebound somewhat in 2007 as milk production gains are smaller. Projected milk prices are then relatively flat for several years, but rise over the last part of the baseline as production gains slow further. Nonetheless, milk price movements are projected to be less than the general inflation rate after 2007.

USDA's prediction that per capita consumption of fluid milk will continue to decline is especially concerning in light of recent calls by some dairy cooperatives for USDA to hold a federal order hearing to consider higher regulated minimum prices for such products. (See previous News Update story.) USDA's Economic Research Service reports that the total volume of fluid milk products sold in 2004 — 53.3 billion pounds — was the lowest since 1984; and 2004 also saw the highest Class I prices on record. Preliminary USDA data for 2005 estimate that fluid milk sales declined another 0.1% last year. Data have indicated that higher Class I prices clearly correlate to lower milk sales at retail.

Another way to look at this is to consider how much we want to burden a shrinking category with higher regulated prices. Since 1984, we've had plenty of growth overall — U.S. milk production has grown by 41.1 billion pounds (over 30%), but fluid milk consumption has grown by only one-half a billion pounds (0.5%). Based on this fact, it really makes no sense to squeeze more revenue from this sector of the market.

Posted February 27, 2006