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Dairy Market Update: What Changes Will the New Year Bring? 
By Bob Yonkers, IDFA Chief Economist, Ph.D.
Looking back at 2006, it's evident that the dairy markets certainly have changed direction from the same time last year. Record high milk and dairy product prices started in 2004 and were followed by the third highest farm milk prices in 2005. Farm milk production was surging as 2005 ended, and this growth pattern continued into the first half of 2006. While domestic demand for milk and dairy products continued to grow, the pace of farm milk production growth exceeded the ability of the domestic markets to absorb it. Between March and June 2006, the U.S. Department of Agriculture (USDA) purchased over 63 million pounds of nonfat dry milk under the Dairy Price Support Program. But then around mid-year, the markets began to adjust. Farm milk production growth of 5% in the first quarter of 2006 slowed to less than 1.5% by the third quarter. Meanwhile, the availability of nonfat dry milk, coupled with the lower value of the U.S. dollar versus currencies in other countries, led to a surge in exports. Through October, U.S. exports of nonfat dry milk and skim milk powder were up 10% compared to the same period in 2005, reaching 559 million pounds. Dry whey exports for the same period in 2006 were up 41% to 623 million pounds. The result: The low farm milk prices seen during most of 2006 have definitely turned around. At the Chicago Mercantile Exchange, the Class III futures contracts average for all 12 months of 2007 have been trading around $14 per hundredweight, the third highest Class III average price on record. The year ahead holds many uncertainties for the dairy industry. Will the past year's surge in exports continue? Will the slower milk production growth of the second half of 2006 recover, and if so, when in 2007 will that occur? How will consumers respond if the markets are correct in their forecast for higher prices on average in 2007? These are just some of the issues that IDFA's Dairy Market Update columns will cover in the new year.
Posted January 2, 2007
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