Middlemen were largely responsible for the highs in milk and dairy product prices
A reduction in the milk supply in the U.S., Europe and Oceania during 2013 pointed
toward higher milk prices during 2014. Robust demand worldwide—particularly from China—added fuel to the fire.
But middlemen—brokers, traders, grocers, foodservice operators—were largely responsible for the numerous record-shattering monthly highs in milk and dairy product prices. Here’s how it happened.
The record high prices of 2014 have their roots back in the third and fourth quarter of 2013. This is when buyers from around the world were placing their orders for cheese and other dairy products—orders that would be delivered to the Pacific Rim and Mexico and MENA (Middle East and North Africa) during the first half of 2014.
They placed huge orders. January through June, U.S. cheese makers sent 439 million pounds of cheese to customers around the world. That is almost 8% of the cheese produced during the first half of the year. This was very supportive of the market.
However, these middlemen didn’t just place orders; they hedged many of their purchases. The block cheese price at the Chicago Mercantile Exchange (CME) hit a monthly average high of $2.36 per pound in March and averaged $2.20 per pound during the first half of 2014.
Yet importers were paying about $1.75 per pound during the first quarter and into in the second quarter. Cheddar cheese export shipments finally moved above $2 per pound in June to average about $2 per pound for the year. Protected from the high cash prices via hedging, importers kept the shipments coming. Again, this was very supportive of the market.
Meanwhile, back at home, another group of middlemen—grocery retailers—were like deer in the headlights. They were frozen in disbelief when they looked at the CME price board. So, they didn’t push much of the
increase through to consumers.
Consumer Price Index data indicates retail cheese prices and beverage milk prices were only about 8% higher than one year earlier throughout much of 2014.
Meanwhile, the CME price was up 27% during the first half of the year and 17% in the second half.
Food service menu prices, despite big spikes in several commodity prices, were up less than 1% throughout last year.
As middlemen behaved like shock absorbers, consumers didn’t feel the pain of sharply higher milk and dairy product prices, and your milk price was able to remain at or near record high levels.
Yes, the prices eventually collapsed, but thanks to middlemen, they remained very high for a relatively long time.