Market Watch Diary: Strong Demand, Higher Prices

September 11, 2012 08:59 PM

JerryDryer blueBy Jerry Dryer

When you look at your profit and loss (P&L) statement for the first half of 2012, one word probably sums it up: ugly.

Mother Nature helped push milk production sharply higher during the first quarter and milk prices ticked steadily lower. Then Mother Nature turned ugly and so did the P&L.

On the demand side of the price equation, most of the pundits and lots of politicos were bemoaning the economy. Their reasoning: If consumers were lucky enough to have a job, they were still struggling to make ends meet. Sales will have difficulty matching the anemic levels of one year ago, the economic seers were saying.

Well, a funny thing happened on the way to the grocery store and the restaurant. Here in the U.S. and in emerging markets around the world, milk and dairy product sales were strong.

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Commercial disappearance of milk and dairy products increased by a very respectable 2.4% during the first half of 2012. This "sales" gain came on top of a 1.5% increase during the first half of 2011 and a 2.8% increase the year before that.

Commercial disappearance doesn’t exactly measure sales, but it’s the best tool we have. When I’m preparing my monthly milk price forecast, I keep a close eye on disappearance for several reasons. The most important is that commercial disappearance, as measured by USDA, tracks the movement of dairy products across all channels of distribution.

The disappearance calculation keeps tabs on milk and dairy products that leave grocery stores and restaurants and that are used by food companies to make candy bars, frozen pizzas and so forth. The monthly disappearance estimates also capture dairy exports.

One more thought before I get to the really good news. Monthly commercial disappearance data sometimes have the hiccups—that is, they aren’t very reliable. It’s a statistical thing. I use a three-month or six-month rolling average to spot trends and forecast prices.

And that is where I found the good news for milk producers—in higher milk prices. Product-by-
product growth in the commercial disappearance has been very respectable this year. During the first half of 2012, the commercial disappearance of butter was up 3.7%; this on top of a 9%
increase during the first half of 2011. Nonfat dry milk disappearance was up a whopping 26% this year after being up nearly 5% last year.

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While cheese disappearance was up only 1% during the first half of this year, it was up 4.5% one year ago and 3.8% two years ago. Back-to-back-to-back gains like these are the envy of the marketers of most foods.

Commercial disappearance doesn’t tell the whole story, but it tells me enough to be forecasting an All-Milk price of more than $20/cwt. during the fourth quarter of this year and the first quarter of next year—not so ugly after all.

Jerry Dryer is the editor of Dairy & Food Market Analyst, You
can contact him at

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