Market Update
April 27, 2009
Dairy Market Update: Farm Milk Production Declines; Futures Market Signals Higher Prices to Come
By Bob Yonkers, IDFA Chief Economist, Ph.D.
U.S. farm milk production declined for the first time in nearly five years as farm milk prices fall, but dairy futures contracts indicate higher farm milk prices may come by year end.
U.S. farm milk production in March declined 0.3 percent from a year ago, representing the first year-over-year decline in nearly five years. The last decline was in June 2004 when production was 0.2 percent lower.
According to U.S. Department of Agriculture data, which covers state-level farm milk production estimates for 23 states, the states increasing the most were in the plains and Southwest; Texas was up 8.4 percent, Kansas increased 7.8 percent and New Mexico was up 3.8 percent. Meanwhile, states in the East and West saw the greatest farm milk production declines, with Vermont down 4.5 percent, Washington down 4.1 percent and California, the largest milk-producing state, down 3.8 percent.
This production decline comes after four straight years of annual growth exceeding 2 percent, only the second time such a string of growth occurred (the first ran from 1980 to 1983). The high farm milk prices from 2004 to 2008 were a key contributor to the farm milk production growth; the four years with the highest milk prices on record occurred during that period.
While farm milk prices have declined significantly during the last six months, the futures market suggests that a rebound may be occurring. The benchmark Class III milk price for February 2009 was $9.31 per hundredweight, but it rose to $10.44 in March as the April Class III futures contract at the CME Group settled April 24 at $10.78.
Market participants believe that farm milk prices will continue to increase through 2009, with the average CME Group Class III futures contracts for the fourth quarter of this year averaging $15.18. The simple average for 2010 contracts was $15.68 per hundredweight, which would be third highest annual average Class III milk price on record after 2007 and 2008.
BACK
