Nose Dive

Dairy Economy Trending Downward

Volume 133, No. 28 Friday,January 9, 2009

As these words are written, the spot market for block Cheddar cheese swooned to $1.04 per pound at the Chicago Mercantile Exchange, the lowest level for Cheddar in six years. This price, nine cents below the federal government’s “support price” for Cheddar, will likely rebound a few cents.

The Cheddar price nose dive - down a dizzying 75 cents in one month - is a reaction to multiple factors, including in no small part panic over a weakening US and world economy.

The nation is not awash in Cheddar - 2008 production of the cheese is pegged at 1.5 percent higher than 2007 through November, but production was weak in the first half of 2008 and stronger in the second. Since June, 2008, Cheddar production has been 2 percent higher than the previous year - before that, production matched 2007.

Key factors in the price slide include milk production gains in 2008 and the precipitous drop in nonfat dry milk prices. Milk production in 2008 averaged 2.3 percent higher than 2007 through November.

In August, nonfat dry milk prices began their own stunning slide, declining nearly 60 cents per pound in the last five months of the year. The current nonfat dry milk price rests just above the government support price of 80 cents per pound.

A turnaround in the value of the US dollar and reports of milk production strength in Europe and Oceania curbed record nonfat dry milk sales in international markets. According to US Dairy Export Council (USDEC), exports of nonfat dry milk slowed in October (their most recent data).

While exports in October were higher than 2007, the 24,640 metric tons exported was down 33 percent from the pace of the first nine months of 2008.

The greatest concern for 2009 isn’t lagging milk prices, but the opportunity for price recovery both at the dairy farm and dairy processing levels.

Cheese and whey exports also have cooled. While October 2008 cheese tonnage was up 7 percent, this gain was the first time in more than two years that cheese exporters didn't see double-digit year-over-year growth, USDEC reports.

Domestic whey prices have bottomed out. Dry whey at 17 cents per pound has placed a net negative value on dairy producer milk checks since October.

Equally disappointing is the decline of whey protein concentrate values during 2008, falling from $1.24 per pound in January to 43 cents in December. Lactose, which reached as high as $1.00 per pound in 2007, is essentially a valueless product at today’s 16 cents per pound (and 8 to 10 cents per pound on the spot market).

Exports lifted whey product values in 2007 and the collapse of those markets has crushed them. According to USDEC, shipments of whey protein concentrate in October 2008 were down 51 percent, and dry whey down 17 percent compared to the previous year. In the first ten months of 2008, USDEC reports, exports of all whey proteins were off 19 percent from a year ago.

Across the board, dairy products have seen values shrink to minimum levels, resulting in fewer dollars to pay dairy producers. But milk prices and dairy product values don’t align quickly due to federal milk market order price formulas.

Cheese makers faced a $15.28 Class III milk price in December while watching cheese and whey values plummet. This lag in milk price levels will hit hardest in January, and red ink will flow into February.

The greatest concern for 2009 isn’t lagging milk prices, but the opportunity for price recovery both at the dairy farm and dairy processing levels. In 2007, rising exports (and a weak US dollar) combined with an exuberant economy to boost dairy prices to record levels.

Now economies in the US and abroad are faltering, and neither can rescue sinking demand. Low milk and cheese prices in 2009 will stress producers and processors.

From the bottom of a market there’s nowhere to look but up. Dairy prices caught up with market realities in the last three months and the dairy industry will react with lower milk and dairy product production.

Sales of dairy products to government storage should stabilize prices at higher levels than this week. Foodservice sales will suffer in 2009, but domestic use of fluid milk, cheese and butter should increase.

The wild card in 2009 is global production and use of dairy products. Normally bargain basement prices in the US would stir international demand for American dry whey, nonfat dry milk and cheese.

But a global recession changes the equation, and US success in exporting dairy products this year will shape the speed of a recovery in domestic milk and dairy product prices. r

 

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org

 

Other John Umhoefer Columns

Dairy Dives into 2009
UnCOOL
Consider This...
 Fulls Vats
Implement Make Allowances ASAP
Security Reforms
Spring Forward
A Week of Clarity
The California Whey






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