The optimism of December failed to materialize. "The worst is over,” we proclaimed. And then April milk futures, which traded above $15.50 just prior to Christmas, fell to $12.35 just three months later.
What happened? Production started to come back, the world market cooled and the market overestimated consumers' willing-ness to pay higher prices.
With the prospect of stronger returns in 2010, dairy producer culling activity slowed. The U.S. dairy herd grew by 6,000 cows in the first two months of the year, after falling by 21,000 head per month in 2009. Moreover, Wisconsin dairy producers continued pushing to get as much production out of their cows as possible. Output was up 5.3% in Wisconsin in January and February, with productivity up nearly 3 lb./cow/day compared with last year.
In addition, the number of replacement heifers in the pipeline on Jan. 1 was unexpectedly high: 4.52 million, up 2.4% from a year ago.
Compounding the supply overhang, commercial American cheese stocks remained at record highs. On Feb. 28, holdings were equal to 52.6 days of consumption, up 8% from the prior year.
Some of the earlier enthusiasm was based on a red-hot international market last fall, but that rally topped out. Commodity prices nearly doubled from July to November, then dropped 10% to 20% in the next three months. The run-up was attributed to pipeline refilling, and with that task complete, orders slowed in early 2010.
Prices improved slightly in March, but industry leaders say prospects for the kind of run-ups seen in 2007–08 are unlikely. Instead, global traders characterized the world markets as balanced heading into the U.S. and European spring flush.
Meanwhile, the overall consumer malaise is keeping a lid on commodity prices. Consumer confidence has been feeble for more than two years now, and while that doesn't directly translate into lower consumption, it does dampen shoppers' appetite for reaching deeper into their wallets.
Value is the byword of the retail sector these days. If supermarkets can't raise prices, retail buyers aren't inclined to bid the market up.
Consider: Wal-Mart, which sells more than 20% of the food in the U.S., implemented a fresh round of price rollbacks this month on food and other consumables. As the rest of the sector struggles to compete, this will keep continued downward pressure on commodity prices.
International dairy prices