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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

2010 Dairy Outlook Clouds Over

Mar 15, 2010

By Jim Dickrell, editor, Dairy Today

 

The optimism that reigned in December and January for 2010 milk prices has become a much more sobered outlook for the rest of the year. The only good news: Don’t expect a repeat of $10 or $11 milk so common last year.

 

Global dairy demand will clear U.S. surpluses, though the demand is not enough to drive milk prices up significantly, says Bill Cordingley, a dairy analyst for Rabobank International. Cordingley, a young Aussie based in New York City, offered his outlook at last week’s High Plains Dairy Conference in Amarillo, Texas.

 

“I’m not overly optimistic about demand racing away in 2010,” he says. Why?

 

• The economic recovery expected in 2010, driven by 2009 U.S. stimulus dollars, is more uneven than expected. “Retail price deflation (which had occurred in the second half of 2009) is over,” he says. And as a result of higher milk prices, many dairy products on grocery shelves are more expensive than substitute products. For example, butter is now much more expensive than vegetable-oil based spreads.

 

• “With the U.S. unemployment rate still running at 9.7%, and consumer spending 70% of the economy, where will the growth come from?” he asks.

 

• In addition, many wholesale buyers who bid up dairy products in the fourth quarter of 2009, fearful of shortages reminiscent of 2007, have now filled their pipelines. They’re now in position to “wait and see” what happens to demand, milk production and prices heading into the second and third quarters of 2010.

 

More ominously, there are potentially even darker clouds on the horizon. Cordingley says the 2010 downside risks are a double-dip recession, a spike in Northern Hemisphere milk production in the United States and Europe, and a sharp reduction in dairy imports into China. “None of these are certain, but the risk lies on the downside,” he says.

 

If you can survive the next year or so, Cordingley believes dairy price prospects are much brighter. Population projections show the world will add another 400 million consumers over the next five years as the global economy revives.

 

“Incomes will increase in Asia, and there will be a continued conversion to more Westernized diets that contain dairy products,” he says. McDonald’s, for example, plans to open 500 more restaurants in China alone over the next five years.

 

“At Rabobank, we feel dairy is positioned pretty nicely in this picture and we’ll see good growth in the next five to 10 years,” he says.

 

Low-input and grass-based dairy producing nations will eventually grow their milk output and become more competitive. But that could be a decade away. In the meantime, the U.S. is well positioned to take advantage of growing global demand—at the right price. To do so, U.S. suppliers will have to develop better relationships with key buyers and better tailor products to end-user requirements.

 

Of course, the key to taking advantage of these new opportunities is to survive the short-term price squeeze. “We’re clearly in a volatile situation and the old rules don’t apply…. Dairy producers need to manage risk and be forward thinking,” he says.

 

“When you can lock in a margin, it is more important to do it today than ever before…. Caution is the better part of valor,” Cordingley says.

 

That’s good advice. The trick, of course, is finding those prices that offer those margins. That means knowing in detail your cost of production and cash flow needs. It means paying attention to markets daily. And it means not hesitating to lock in margins when they occur.

 

Contact Jim Dickrell at jdickrell@farmjournal.com.

 

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COMMENTS (176 Comments)

Anonymous
Risk is real, Dairy farmers of the future will learn to deal with it or have deep pockets.
11:16 PM Mar 28th
 
Anonymous
How come there is no comment box on that blog?
9:52 PM Mar 28th
 

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