Jim Dickrell is the editor of Dairy Herd Management and is based in Monticello, Minn.
Dairy Price Crash Unlikely
Oct 09, 2011
While some pundits and producers worry that 2012 dairy markets could be a repeat of 2008-2009, déjà vu all over again is unlikely. That’s despite the fact that exports are approaching 13% of U.S. milk production, up 20% from where they were in 2008.
"We don’t have a 2008-2009 collapse ahead of us," says Alan Levitt, contributing editor to Dairy Today and longtime dairy trends analyst.
Levitt is the first to admit that recent global dairy market news has not been encouraging. And dairy futures through the first half of 2012 aren’t all that encouraging either. There are three main reasons for concern:
• Global milk supply in the major exporting countries (EU-27, U.S., New Zealand, Argentina and Australia) is up 2.6% year-to-date over a year ago, or 8.6 billion pounds through July. "We could end up with 12 to 14 billion pounds more milk from these top five exporters for the year," Levitt says. "The European Union is up 2% alone, which hasn’t happened since quotas were imposed there in 1983."
• Global imports have slowed, particularly in the second and third quarters of 2011. Part of that is due to global economic concerns. Additionally, importing countries had bought ahead earlier in the year and now have ample supplies. Plus, there’s just more milk available and buyers are waiting for further price reductions before they make new orders, Levitt says.
• New Zealand has been pricing its dairy commodities aggressively, knowing it has increased production that it must dispose of at a time of softening markets. The fall of the year is when Kiwi production peaks, often resulting in seasonal pressure on prices.
• Both China and Russia have backed off on their dairy purchases in the second quarter of 2011, accounting for much of the slowdown in global trade.
But it’s not all doom and gloom. "The fundamentals of dairy markets are still sound, and dairy is more entrenched in diets than ever before," Levitt says. "The South Koreans, for example, won’t stop eating their pizzas just because of a gloomy economic outlook."
Even though dairy imports have backed off, they are still at high levels historically. At the end of the second quarter of 2011, imports were more than 900,000 metric tons. A year earlier, when imports were setting records, the world was importing 830,000 metric tons. So even though sales have dipped from a peak that approached 1 million metric tons this summer, they are still running nearly 10% higher than the previous peak.
Global dairy demand is also now more sustainable at higher prices. Levitt notes that powder, cheese and whey prices are still running 20% to 30% higher than the five-year average (butter prices are 60% higher) and yet purchases remain strong.
U.S. manufacturers are also becoming more reliable global suppliers. They realize that the U.S. dairy price support program no longer presents a viable, sustainable floor. "The dairy price support program is not an option this time," Levitt says. So manufacturers are doing everything they can to meet and sustain overseas customer demand.
Plus, softening prices should bring some buyers back into the market. Those who have been waiting to buy are starting to see pricing opportunities.
Levitt isn’t saying there’s nothing to worry about in world dairy markets and the global economy. But there’s no reason to panic, either. And given the uncertainty of everything else heading into 2012, that may be as good as it gets. Let’s hope he’s right.