Dairy Market Update: Prices Continue to Climb This Summer

Prices for some dairy products are reaching near-record highs this summer, as growing worldwide demand and depleted stocks in Australia, New Zealand and the European Union (EU) push U.S. dairy products to fill the gap. Prices for fluid milk, cheese and butter remain strong, while the market for dry products last week was mixed.

For fluid milk, the U.S. Department of Agriculture (USDA) announced that the Class I minimum price mover for July, $20.91, was the second highest ever. The record price of $21.13 per hundredweight was set in June 2004. This minimum price is the amount fluid milk processors must pay for farm milk used to make whole, reduced-fat, lowfat and fat-free milk. Depending on where the fluid milk processing plant is located, a Class I differential equal to between $1.60 and $4.20 per hundredweight is added to this Class I minimum price mover. In addition to the differential, USDA reported that over 90% of the farm milk used in Class I products receives a price higher than this minimum, known as an over-order premium.

Reports out of New Zealand indicate that stocks of all dairy products available for the world spot market are near all-time lows, because the southern hemisphere has moved into winter, and the pasture-based milk production season there has ended. Meanwhile, Australia has been experiencing a long-term drought and expects milk production to be down by about 7% in the 12 months ending June 30, with expectations for further declines in the coming year.

Cheddar cheese at the Chicago Mercantile Exchange (CME) also increased to 10 cents per pound last week, closing at $2.10, one of the 10 highest wholesale prices ever. In addition to domestic U.S. prices, USDA reported that the price of cheddar cheese sourced out of Oceania has increased 35 cents per pound in the past month to $1.79.

While butter prices at the CME inched up one cent per pound to $1.49, prices for butter in the European Union (EU) have increased dramatically in the past few weeks; USDA reported that the EU price of $1.80 exceeds the U.S. domestic price. In mid-June, the European Commission reduced the export subsidies for butter and cheese to zero (the skim milk powder subsidy has been at zero for several months). This marks the first time since the implementation of the current EU policy in 1968 that export refunds for all three dairy products are at zero.

Meanwhile, the National Milk Producers Federation reported that the Cooperatives Working Together (CWT) program provided export assistance last week to move 3.7 million pounds of U.S. butter overseas, with over 60% going to European countries.

The domestic market for dry products last week was mixed. USDA reported that the price for nonfat dry milk in the central states (midpoint of the mostly range) increased 5 cents per pound to $2.2050. Meanwhile, the central states (midpoint of the mostly range) price for dry whey last week moved down one-half cent to $0.7250 per pound. Internationally, USDA reported that prices for both products in western Europe moved up during the past two weeks, reaching $2.34 per pound for skim milk powder and $0.86 for dry whey.

Posted June 25, 2007