Demand slows due to high prices
Sep 17, 2008
There has been much discussion over the effects of significantly higher costs and the impact it will have on milk production. More importantly, the impact it will have on milk prices.
Lower cheese and Class III prices compared to earlier this year have caused concern over profitability. Some input costs have declined while others remain high, or in some cases have risen. So far the effects have been varied across the country. While some producers are having difficulty keeping up with bills others are expanding.
There is some ray of hope that Class III milk prices will move back into the $20 per cwt. range sometime in the next year, but this will require a higher cheese price than last year. Cheese price will need to make up for the lower whey price, which has not recovered from the effects of record high price last year. Demand for whey dropped off when record high whey price was realized last year, and although price is currently lower the demand has not returned. In fact, price continues to weaken.
Dry whey price has fallen significantly since April 2007, when price peaked at $0.7933 per pound. The current NASS weekly price is around $0.2350 per pound. This drop of 56 cents represents a Class III price decrease of $3.36 cents per cwt. To compensate, cheese price needs to be 33 cents per pound higher to make up for the loss in dry whey price. Of course butter price has an impact on price as well, but for the sake of comparison, I am using the cheese price.
So why is the whey price so low? High price cured high price. Demand shifted away, both in human consumption as well as animal consumption. Alternatives were found, and continue to be used. Stocks of dry whey increased even when cheese production was being limited because of high milk prices. When cheese production increased this summer whey stocks continued to increase resulting in a weak market. There is no indication of tightness, and buyers are standing back making purchases only when they need to while waiting to see if price will weaken further. Dry whey price in the Western region of the country remained somewhat stronger for much of this summer, but this has changed in the past few weeks with price weakening significantly. Export sales are very slow with the lower price still not spurring much buyer interest.
Nonfat dry milk has followed a similar pattern as whey, with significantly lower price from last year in a weak market. Prices are declining and stocks are building. The nonfat dry milk price is in the mid-$1.30’s versus the high of $2.0855 per pound on the weekly NASS surveyed price. Stocks increased significantly as demand slowed and production increased due to milk being shifted over to butter/powder production. Butter demand remained strong, but nonfat demand slowed both domestically and internationally. Nonfat dry milk that has been moving to China contains a nitrate level too high to pass import inspections. This has been curtailing sales to China and has caused some load rejections. This is something that needs to be changed quickly.
The dry markets will come back in price eventually, but for the time being these markets are weak and will not be much help in boosting milk prices.
Upcoming reports to watch for are the August Monthly Milk Production report on September 18; the October advanced Class I price on September 19; the August Monthly Cold Storage report on September 22; and the August Livestock Slaughter report on September 26.
--Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their Web site at www.agdairy.com.
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