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Market Watch Diary: New Pricing Paradigm

January 24, 2014
By: Jerry Dryer, Dairy Today Contributer
 
 
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Dairy prices and pricing appear to have new leadership—and that leadership that could be around for years to come.

Say hello to Class IV, butter and nonfat dry milk/skim milk powder. And then say hello to the world market.

We’ve known both—Class IV as the "higher of" used to drive the Class I price mover and the world market—but each segment has a much more significant role in the dairy market today.

First, take a look at the role reversal between Class III and Class IV. The dairy price support program and plant operational efficiencies were the stepparents of nonfat dry milk. There was almost always too much nonfat dry milk.


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Other reasons for demand growth


The support program guaranteed an adequate supply of milk—almost always too much. The residual milk was cheaply turned into nonfat dry milk with a long shelf life. Do you remember the times when the government warehouses were bulging with a billion pounds worth of excess milk powder?

Cheese, meanwhile, has been slurping up more and more milk, year after year, for as long I’ve been in the dairy business—more than 40 years!

More than 30 years ago, cheesemakers started extracting value from whey, and the rest is history. The Class III milk price, a byproduct of the cheese and whey prices, became the pacesetter in the marketplace.

Now, take a look at the new demand curve. Consumers in the U.S. have long had a love affair with cheese. But a few years ago, visitors from around the world began sitting down at the U.S. dinner table.

Many of these new visitors (paying customers with cash in their pockets) were accustomed to an occasional pizza or a cheeseburger. But many of our guests were more interested in having a glass of milk, infant formula for a new arrival or any of a host of other dairy-based products, including confections, baked goods and desserts.

These new consumers wanted lots of dairy and dairy-based foods. The easiest way to deliver dairy across the ocean is to dry it. Those billion-pound warehouse stocks were soon gone, while demand was growing still stronger.

Fast forward. With dry dairy in great demand, the Class IV price average for all of 2011 was greater than the Class III price. It was not higher month-after-month, but it was higher on average for the year. This was a first.

In 2012, Class IV slipped, but last year (for the first time ever) the Class IV was the "higher of" each and every quarter and higher for the year by $1.05.

If my forecast is correct, Class IV will be the "higher of" each and every month during 2014, with the annual average spread widening to almost $2.

Yes—dairy prices definitely have new leadership at the helm.

Jerry Dryer is the editor of Dairy & Food Market Analyst, www.dairymarket analyst.com. You can contact him at jdryer@dairymarketanalyst.com.

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FEATURED IN: Dairy Today - February 2014
RELATED TOPICS: Dairy, Marketing, Risk Management

 
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