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More Strength Ahead for the Dairy Market

Jan 14, 2013

Underpinnings to dairy prices are still bullish in 2013.

Kurzawski photo 2013By Dave Kurzawski, INTL FC Stone

If you look past weaker international cheese prices for a moment, it wasn’t that hard to make an argument for $2.00 cheese or butter at some point during the 2012 holiday rush. Strong U.S. consumer demand coupled with slowing U.S. milk production was the dry tinder that lit up cash prices this fall. While we now know that is not the case, don’t be surprised if the $2.00 dairy price point re-emerges in 2013.

First off, although prices have risen to make many producers across the country profitable relative to high-priced feed in 2012 (break-evens are generally $17.50-$18.50 in most areas now), it’s a very large stretch to say there has been much healing at the farm level over the past three years. Yes, milk production increased to 1.0% in November due to improving weather in many milk sheds throughout the U.S., but something much more valuable for 2013 still appears to be at an all-time low: confidence in the industry.

Existing dairies are doing their best to balance their resources with an ever-volatile price for their milk. With month-to-month profitability evading many of those who do not use some sort of risk management, the long-term picture is cloudy at best. The lack of confidence doesn’t necessarily impact milk-per-cow figures but, rather, impacts dairy expansion and interest in the business as a whole. And the one-two punch brought on by a lack of capital investment and a lack of young people on the dairy farm, is a much more severe problem for those who buy milk going forward.

To look a little closer at the current production situation: Cold winter weather in many areas recently mixed with the impact of poorer forage quality will likely limit near-term production to 1%, maybe 1.5%. To keep up with demand, the USDA needs to be reporting somewhere closer to 2% growth in U.S. production. The lack of confidence in the business only serves as a black cloud over what is really only lackluster milk production growth. The key here is that lackluster production growth will only serve to enhance ebbs and flows in dairy product demand.

Fluctuations in the demand for cheese tend to drive price. The past few months have been a swift reminder that the vast majority of our business is still very much domestic in nature. Strong domestic sales in September and October of 2012 gave way to a very quiet domestic sales scene over the past two months. But can we really expect more of the same ho-hum demand and rising dairy product inventories over the next two months? Not if you feel the U.S. economy is on the mend, as I do.

U.S home sales rose by 14.5% in November, the Dow Jones Industrial Average is back above 13,000, and sales at U.S. retailers increased by 0.1% in December or 6.5% higher than 2011, to name a few current economic underpinnings. And that was during the heated election cycle and arduous "fiscal cliff" panic. The shaky ground of government infighting has been calmed somewhat, giving way to what is expected to be a rise of consumer confidence this month. And that means we ought to expect better retail sales, better restaurant sales and better dairy product demand through Q1.

The issues of strong U.S. demand, questionable milk production growth and a pervasive lack of capital investment in the dairy industry are real issues facing the dairy industry in 2013. Just because they may have gone dormant as we hit a pocket of product availability over the past month or so doesn’t mean that the underlying fundamentals have changed significantly enough to avoid another significant price increase at some point in the first half of 2013. Remember, when we merge a dwindling milk supply with a growing hunger for dairy products, the risk for dairy prices is not down — but up. So we’re taking a respite from higher prices now. But the deck has not been reshuffled, and the market, as I see it, is still poised for more strength in 2013.

Dave Kurzawski is a Senior Broker with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach Dave Kurzawski at 312-456-3611 or dave.kurzawski@intlfcstone.com.

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