By Jim Dickrell
It’s probably more than fitting that my first column of 2010 is on world dairy markets. In 2009, it was the collapse of said world markets that led to the most difficult price year in living memory.
Recall that a 50% decline in U.S. dairy exports last year resulted in a 3.5% increase in U.S. stocks, which resulted in a 35% decline in the All-Milk Price. Those are numbers worth paying attention to. You can be assured your lender is.
The good news, USDA reported last week, is that world dairy markets are staging “a dramatic and somewhat unlikely rebound given the availability of ample stocks of butterfat and nonfat dry milk (NFDM) in the United States and the European Union (EU).”
But the report goes on: “The reality, however, is that stocks of U.S. NFDM have been mostly committed while EU stocks are at this time unavailable to markets since any release would likely negatively impact on domestic prices and risk igniting political opposition.”
In other words, U.S. dairy producers have their ornery, cantankerous brethren in France and particularly Belgium to thank for keeping the lid on the release of EU milk powder surpluses.
The other good news is that there’s a hungry world out there, willing and once again able to buy dairy products. USDA notes that world trade in NFDM averaged just over 1 million tons per year between 2005 and 2008. Last year, despite a severe global recession, exports of NFDM dipped only 40,000 tons—or a mere 4%.
Still, surplus stocks are a concern this year. The EU is sitting on nearly 260,000 tons of NFDM and another 76,000 tons of butter. U.S. holdings of NFDM are close to 120,000 tons, but 75% of that has been committed to domestic feeding programs and is therefore (somewhat at least) isolated from the market.
Yet USDA economists remain optimistic, primarily because the gross domestic product of developed nations (like the U.S.) is expected to rise 1.7% in 2010. Developing nations are forecast to grow 5.5%, and China is forecast to grow by at least 9%. This contrasts with 2009, when world GDP shrank 2.2%.
While world milk production is expected to grow by 1.3 million tons next year, that’s less than 0.5% growth. The EU is expected to show little or no growth, the U.S. and Australia are both expected to decline 1%, and New Zealand’s output has already been adjusted back to just 1.5%.
Naysayers will counter this relatively good news with the fact that U.S. dollar is strengthening, and could cause a decline in importing countries’ purchasing power. Perhaps. But keep in mind that many of these countries, including Mexico and those in the Middle East, export oil—which also trades in dollars. So as we send them our dollars for their oil, they’ll be sending some of those very same dollars back to us to buy powder and cheese.
In the end, all of this is reason for cautious optimism: “The 2010 outlook for U.S. dairy exports is relatively bright, with NFDM and cheese exports expected to expand 16% and 7%, respectively,” says USDA. “NFDM exports are expected to be competitive on world markets; however, a decrease in U.S. production may lead to some rationing of NFDM if domestic demand is sufficiently strong.” For the complete report, click here.
In fact, powder prices are so strong they will likely be higher than cheese and therefore “the higher of” for setting Class I prices over the next month or two or three. In high fluid Federal Orders, powder prices are the driving force for rebounding prices.
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—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at firstname.lastname@example.org.
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