In the new world of dairy markets, spot prices don’t respond to government reports like they used to, and the day-to-day gyrations are mostly noise. But here are six guiding principles to help make sense of where we’re going:
- Global markets drive U.S. markets. Since 2006, there’s been about a 90% statistical correlation between the Oceania skim milk powder price and the U.S. All-Milk price. U.S. markets, for better or worse, are impacted by what happens to dairy production and utilization around the globe.
- Exports are the industry’s growth driver. This means the U.S. must continue to clear most of its new production overseas. If export rates slow, price declines will follow until the brakes are put on in the supply area. Conversely, a consistent or growing rate of exports will be supportive of prices.
- Dairy prices are interconnected, and money moves milk. Each value is tethered to the others. For instance, Class III and Class IV prices tend to align over time. Protein values tend to sync up as well; see the fourth guiding principle. (The historical relationship between nonfat dry milk and whey products, however, seems to be resetting at a new level.) U.S. and global prices move in tandem. Corn and milk prices tend to correspond. The same indicator doesn’t always lead, but when one breaks out from the pack, it pulls on the rest.
- Whey proteins are expected to be structurally short for the next few years. Global demand for whey in infant formula and nutritional/performance foods is entrenched. Production, on the other hand, hasn’t kept up. New capacity will start coming on line in late 2012 (mostly elsewhere, such as South America and Europe), but in the meantime supplies will be tight and prices historically high.
- Volatility is a permanent part of the mix. With a lack of buffer stocks, the agricultural markets are increasingly susceptible to shocks, including weather, the economy and policy. The situation in dairy is exac-erbated by lagging price responses, which cause supply and demand to consistently overshoot each other. Intervention mechanisms also distort natural market responses.
- In the long run, the price of milk will reflect the "general" cost of production—no more, no less. Too high, and production will outrun demand and the market won’t be able to clear. Too low, and production will lag. It’s an ongoing push and pull. Unfortunately, the market-clearing price may be too low for some producers. But it will be sufficient for others.
The short-term outlook for U.S. dairy producers may be sour, but long-term prospects for growth still remain positive.
Alan Levitt is president of Levcom Inc. in Crystal Lake, Ill. You can contact him at (815) 459-1742 or email@example.com.