Market Watch Diary: (Slightly) Better Prices Ahead

04:50AM May 30, 2012

**Extended comments highlighted in blue

JerryDryer bluewith Jerry Dryer

Milk prices during the first half of 2012 have churned up plenty of unpleasant memories about the disastrous 2009 dairy markets, but it is time to look at the balance of 2012 and beyond.

It appears that the Class III price will average $15.75 in the first half of the year after averaging $16.28 in the first quarter. The Class IV price has been lower: $15.94 during the first quarter and looking as though it will average $14.80 through the first half of 2012.

These prices come on the heels of record highs established in 2011, when the Class III price averaged $18.37 and the Class IV price, $19.04. Hence, a lot of milk is being produced during the first half of 2012, up 4.1% during the first quarter. I estimate it will be up about 3% for the entire first half of the year.

It wasn’t just high prices that drove milk production: a very mild-mannered Mother Nature was supportive of production per cow. High beef prices kept the tail-enders headed to hamburger heaven, only to be replaced by a fresh wave of better animals.

With plenty of replacements available and the undying urge to make more milk, producers kept adding cows during the first half of the year. Now the question is, where does the market go from here?

market watch diary chart

If my crystal ball is functioning correctly, the second half of 2012 will witness two distinct markets: (1) Month-to-month Class III milk prices will hold relatively steady; but (2) Class IV prices will edge lower, especially during the third quarter. I expect to see some Class IV prices below $13.

On the Class III side of the ledger, demand for cheese and whey has been very strong this year. Cheese-friendly menus at fast-food restaurants have been attracting more customers and international buyers have been busy shopping in the U.S.

Grocers, who had not promoted cheese for 18 months, launched ads and discounted prices ahead of the Easter and Passover holidays and continue to advertise and reduce selected product prices.

High-end whey product sales are doing very well here at home and in the international marketplace. Dual-income households in Asia, to take one example, are buying more infant formula.

Class IV products, butter and nonfat dry milk, had to face a tougher market environment during the first half and are facing more of the same as we move toward year-end.

Historically, "butter-powder" plants have performed a "balancing" function. If milk bottlers and cheesemakers do not need the milk, it goes to butter-powder. That happened this year in spades, given that most of the plant capacity added over the past couple of years has been in butter-powder. Unfortunately, not enough capacity was added.

Plant operators were forced to make low-heat nonfat dry milk, the least desirable of the powders. It would have taken too long to make medium- and high-heat nonfat and skim milk powder, the products being sought by international buyers.

Butter inventories here and in Europe, and powder inventories worldwide, will hang over the market at least through the end of this year. Much of the powder is already in the hands of end users, so it won’t show up in the inventory numbers as reported by USDA.

My bottom line for the second half of 2012 looks much better than 2009, but it still isn’t very pretty. I expect the Class III price to average $16.25 in the second half of 2012 and the Class IV price to average $14.50.