So far this year, the U.S. dairy markets have been anything but normal; but, really, what is normal anymore? It has only been about 10 years since the world began demanding commercial exports of any scale from the United States. During that same time, we have seen short crops, long crops, surging energy prices, food price inflation, seemingly more frequent natural disasters and a global financial crisis that has lingered far longer than any past recessions. I would suggest there are no normal years anymore, and you should think about adjusting to this new reality.

Persistent Export Demand

In the past year, we experienced global demand for U.S. dairy products that put a severe strain on usual patterns in our domestic markets. Wholesale dairy product prices in the first few months of the year remained at higher-than-expected levels after the holiday season. Persistent export demand limited the normal inventory building that goes on in the U.S. markets during the first half of the year.

Record Highs for Butter and Cheddar Cheese

By mid-year, international milk production recovered from nearly 18 months of mostly negative growth, and international dairy market prices began to ease. But here in the United States, end-users have remained concerned with lower-than-desired inventories and slower growth in domestic milk production. As a result, domestic wholesale prices reached record highs for butter and cheddar cheese in recent weeks, and they still remain high.

Available Information Shows Serious Changes Ahead

While it may not be soon enough for everyone, available information indicates that our dairy market is about to undergo some serious changes. Dairy futures contracts at the CME Group expect lower U.S. dairy prices in coming months for several reasons: growing global milk production, political issues like dairy trade bans on European Union products into Russia and continued weak economic growth nearly six years after the start of the global financial crisis.

While the Class III futures markets anticipate a fourth quarter average price of around $22 per hundredweight (cwt), the average for the first quarter of 2015 is more than $4 lower. In addition, while the October butter futures contract is still around $2.70 per pound, contracts for all months of 2015 are nearly a dollar lower.

Market Trends to Watch

Heading toward the end of this year and the beginning of 2015, there are several market trends to watch closely. The fourth quarter is a peak demand period for many dairy products in the United States; if demand is greater than currently expected, prices could remain stronger longer, but signs of sluggish demand and/or overbuilt inventories by end users would have the opposite effect. The impacts of the Russian trade bans will continue to play out and could range from little more than rearranging international trade flows to an overall global demand drop.

As always, markets especially watch the weather in New Zealand as the milk production season there, currently near its peak, winds down in the second quarter of 2015.

Finally, the recent drop in world dairy product prices comes just as global milk production appeared to be fully recovered from the drops seen in late 2012 through early 2014. If the rest of the world is not able to meet the continued growth in dairy product demand, we can expect them to come knocking on our doors again next year.