Sales of excess powder to the government were a common feature of the U.S. dairy market in the first half of the decade, when one out of every three bags of powder coming off the line headed directly to USDA caves.
In the last four years, manufacturers have had a better option. Since the second half of 2004, when world milk powder prices moved above the USDA support price, it has been more profitable for U.S. suppliers to sell nonfat dry milk (NDM) and skim milk powder (SMP) overseas.
From January 2005 to August 2008, the U.S. exported more than 2.5 billion pounds of NDM/SMP, accounting for 43% of production during that span.
Now a slowdown in global markets is threatening to make sales to the Commodity Credit Corporation (CCC) a familiar part of the landscape again.
During the first week of October, 8.3 million pounds of Western-produced NDM was sold to CCC at the support price of 80¢/lb., the first sales to the government in more than two years. Manufacturers cite weaker overseas demand, made worse by uncertainty in global financial and credit markets.
In the volatile dairy markets, the fall of milk powder will put significant downward pressure on milk checks in the days ahead.
The biggest impact will be felt in California, where nearly two-thirds of the country's NDM is made. Under California's pricing system, each penny drop on NDM takes almost 9¢ off the Class 4a, 3 and 2 prices. The California weighted average NDM price fell to $1.09 on Oct. 3, down 25¢ in just six weeks. This knocked $2.18 off the price of the affected milk classes, which make up 40% of California's milk checks. If the NDM price falls to support, it will bite off $2.50 more.
In the Federal Orders, the reduction is similar, but a smaller percentage of the blend price is affected by powder. Classes IV and II make up just about 20% of utilization. The National Agricultural Statistics Service survey NDM price was $1.06 on Oct. 4, down 33¢ from six weeks earlier. This reduces Class IV and II milk prices by $2.86.
The continued strength of the U.S. butter market—supported by Cooperatives Working Together–assisted exports—has prevented milk prices from falling further faster. Heading into 2009, the accumulation of milk powder—and the ability of U.S. suppliers to move their production overseas—will be something to keep an eye on.