Dairy Market Update: Closing out a Record Year

If the old adage, "Records are made to be broken," is true, we can expect dairy markets in the next few years to chase the many records set in 2007. Chief among these is the 2007 average farm milk price, which is expected to exceed its previous record high by $3.00. Retail milk prices and most domestic wholesale dairy product prices also blasted past previous highs, joining international dairy product prices in the record books this year as well.

Before we head into the New Year, let's take a look back at the historic dairy market events of 2007.

Farm milk prices. The U.S. Department of Agriculture (USDA) forecasts that the average all milk price for 2007 will be $19.05, beating the previous record of $16.05 set in 2004 by $3.00. Far from expecting a big drop in milk prices ahead, futures contract prices for Class III milk in all of 2008 expect only a slight drop of $1.85, which would give us the second highest price after this year's average.

Domestic wholesale dairy product prices. Three of the four major dairy products — cheese, nonfat dry milk and dry whey — set record highs this year; only butter missed out. The price of cheddar cheese in 40-pound blocks at the Chicago Mercantile Exchange (CME) reached $2.2025 per pound in November, besting the previous record set in April 2004 by one-quarter cent. For nonfat dry milk, USDA reported that the Central states' price averaged $2.19 in July; the previous monthly average high, $1.59, was set 18 years ago in 1989. Last, but not least, the USDA Central states' price for dry whey reached $0.7780 in April, nearly doubling the previous record set in April 2006.

International dairy product prices. USDA reported record-high prices in 2007 for four key dairy products traded in world markets. Butter reached $1.93 per pound, nearly double the previous record set in 2005 at $0.97 per pound. Cheddar cheese topped out at $2.49 per pound, surpassing its previous record of $1.29 per pound set in 2005. Skim milk powder hit $2.36 per pound, well over twice the previous record set at $1.01 per pound in 2005. Whey powder (Western Europe) reached $0.88 per pound, more than doubling its previous record of $0.43 per pound set in 2006.

Retail dairy prices. The Bureau of Labor Statistics (BLS) reported record prices for fluid milk (per gallon of whole milk) of $3.736 in July and $3.904 in November, with both months breaking the previous record of $3.574 set in June 2004. Ice cream also reached record-high prices of $4.032 per half-gallon in January and $4.225 in November, topping the previous record of $4.026 set in July 2004.

U.S. exports of dairy products. The United States exported 2.5 billion pounds of dairy products through October 2007, compared with 2.1 billion pounds for the same period in 2006. That's an increase of 22%. The value of dairy products exported through October 2007 was $2.3 billion, a 44% increase from $1.6 billion worth of dairy products exported during the same period in 2006. The value of exports edged past the total value of imports, which reached $2.2 billion this year, according to data through October 2007. In fact, the value of exports outpaced the value of imports for six straight months, May through October, in 2007. Should this relationship continue, it would be only the second time in the past 15 years that export value has exceeded the value of imports.

Milk Production. Through November, total U.S. milk production was 169.9 billion pounds, up 2% over the same period last year. Interestingly, Idaho is poised to move up to the number three dairy state, although New York currently holds that position. Just 12 years ago, Idaho was not even in the top 10 states, but since then has increased milk production by 190%.

By all signs, it's clear that 2008 will be a year worth watching in the dairy industry.

Posted December 31, 2007