What factors play a key role in dairy prices in the U.S.?
On the demand side, the domestic market is still the main driver of U.S. milk production. But international sales are a growing segment and continue to gain in importance,
especially in the dried dairy protein area. Increased demand from international markets is pushing milk prices higher due to an increase in NFDM prices that is filtering
through the milk price system. Slow growing domestic demand for cheese and butter is
helping support milk prices, but not adding the value that dried proteins are.
On the supply side, dairy producers have been facing increased costs for most of
their inputs. Due to drought and U.S. energy policy, U.S. dairy producers have been under the most pressure from increased feed
costs that typically are going to make up around 50 percent of their costs. That figure increased substantially in 2011 and 2012.
Lower feed costs over the next 4-6 months will help dairy producers increase milk production, improve cash flow and increase their
equity in their operations.
Whether or not the Farm Bill is passed seems to be a large issue for the dairy industry. How will the sector be impacted if the bill is
passed, or if it does not pass?
If the bill is passed, dairy producers will have a brand new program implemented to provide a safety net. Both sides of Congress
have passed a margin insurance program to replace the handful of current programs that provide a low safety net to dairy producers.
So if a Farm Bill is agreed upon, the margin insurance program most likely will be included. The difference is in a market stabilization program that the Senate has included in their version that the House does not have. The stabilization program will have to be
determined in the conference committee on the Farm Bill. If a Farm Bill is not passed, federal law will revert back to the permanent
legislation from the 1930s and 1940s. For dairy, that would be a return to parity pricing that could move the support price for milk
from a current equivalent of $9.80 to a level in the upper $30s. A milk price in the upper $30s will not be beneficial for anyone, as
dairy producers will produce more milk at a price for which hardly any consumer will pay. This would lead to large excess inventories of butter, cheese and NFDM that USDA will be required by law to purchase. Market prices will not immediately rise to the new
price support level, but just the thought of milk prices that high causes heartburn for most in the industry.
How is strong demand from developing countries impacting the dairy industry?
Over the past few years it has helped offset slow to declining demand in developed countries that have not had the same economic
growth. The developing countries' demand has helped keep dairy commodity prices higher than what they would have been by offsetting relatively strong milk production levels in the major milk shed of the world. In the U.S., the U.S. Dairy Export Council is
reporting that through July 2013, year-to-date exports of total milk solids have amounted to 15.1 percent of total milk production
during the same period. In 2012, the percentage was 13. 5 percent. Dried dairy proteins have been the biggest beneficiary, with over
50 percent of the 2013 production of NFDM/SMP, Dry Sweet Whey, and Lactose moving into export channels. Fonterra, the largest
dairy cooperative in New Zealand, is forecasting a record milk price for milk produced during the 2013-14 milk production season
on the basis of strong international demand.
Consumer tastes are always changing. What are the latest preferences in dairy, and how is this shaping the industry?
Greek yogurt has been the fastest growing segment of the industry the past couple of years. The high protein product is appealing to
a wide segment of the domestic market. We know that the rapid rates of growth in this category will not be sustainable, but where
the category plateaus remains to be seen. One side effect of the demand for higher levels of protein onto Greek yogurt has been
a need to handle the remaining butterfat, and so far there has not been enough demand to offset the excess butterfat that has been
with Bill Brooks, Economist, FCStone, LLC
Food Manufacturing spoke with Bill Brooks of FCStone about the
state of the dairy industry and what issues should be top-of-mind
for dairy processors.
Interview by Lindsey Jahn, Associate Editor