Market Update
October 26, 2009
Market Update: How Quickly Things Change
By Bob Yonkers, IDFA Chief Economist, Ph.D.
Less than three months ago, Agriculture Secretary Tom Vilsack announced a temporary increase in purchase prices under the Dairy Product Price Support Program. Prior to that July 31 announcement, the U.S. Department of Agriculture had purchased (or agreed to purchase) 276.8 million pounds of nonfat dry milk, 4.6 million pound of butter and no cheddar cheese so far that fiscal year (beginning October 1, 2008). USDA expected the temporary increase to cost the federal government $243 million to buy more products than they would have at the pre-increase prices.
So what happened? By the end of September, the total fiscal year purchases were reported by USDA to be less than they were at the time of the announcement; USDA reports net cancellations of nearly 650,000 pounds of nonfat milk dairy that manufacturers previously agreed to sell to the USDA. In addition, no butter or cheddar cheese was purchased in the last three months of the fiscal year.
Marketplace Adjusts without Government Intervention
Clearly, the marketplace was able to adjust to the past year's changes without that added federal government intervention. That is not to say that dairy farm profitability turned around completely, but the marketplace did, and it continues to adjust to ongoing changes in supply and demand factors. In the United States and around the globe, farm milk production growth has slowed due to low market milk prices. At the same time, the world economy is turning around, and dairy demand is returning after running away from the record high prices seen in 2007 and 2008.
This activity is clearly demonstrated in the attached graphs showing world dairy product prices as reported by USDA's Agricultural Marketing Service. Since reaching their lowest prices earlier this year, all international dairy prices have increased considerably. For product out of Oceania (New Zealand and Australia), butter has increased 55 percent to $1.27, skim milk powder (SMP) is up 49 percent to $1.18 and cheddar cheese is 35 percent higher at $1.47; (all prices are midpoint of reported ranges in US$ per pound). Dry whey out of Europe is 109 percent higher at 46 cents per pound. For all these products, world prices today are higher than they were prior to the run up in prices during 2007. Also, the depression in prices was of shorter duration than the 2007-2008 high-price period for all products except dry whey.
Going forward, dairy futures prices at the CME Group indicate that market participants expect domestic farm milk and dairy product prices to continue to increase into 2010. However, some market participants remain concerned about the government stocks of dairy products that exist due to intervention purchases in the past year.
In the United States, nonfat dry milk purchased between October 2008 and July 2009 is fully committed to food- and nutrition-assistance programs. That means those stocks are not available to be sold back to the commercial market. In the European Union, government officials so far have said they do not plan to release inventories of SMP and butter to the commercial market, but the recent dramatic increase in European butter prices may prompt a change in that policy.
These shortages represent a serious downside to having government dairy programs purchase product at times of low milk prices. The resulting stocks of product put a damper on the marketplace until those stocks are gone, which in turn limits upward price movements. In the United States, nearly all other agricultural commodities recognized this long ago; for example, domestic wheat, feedgrain and oilseed policy now focuses on direct payments and subsidized insurance programs rather than policies that result in the federal government taking ownership of inventories.
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