Market Watch Diary The bear is upon us

January 14, 2009 06:00 PM
Alan Levitt
It was fun while it lasted, but the great bull run of 2007–08 came to a crashing end in the fourth quarter of 2008.

The cheese market is entering the New Year below $1.30/lb. for the first time since 2003. Butter is below $1.20/lb. for the first time since 2003, too. Powder is moving to the government for the first time in 2½ years. And the whey price is the
lowest it's been in nearly five years.

In the period from Thanksgiving to Christmas, cheddar blocks lost 30% of their value and butter lost 24%. Once the reality of the situation sank in, Class III milk futures also plunged: Contracts covering the first half of 2009 dropped from an average of $14.80 on Oct. 31 to just $11.77 on December 30th.

It was obvious to just about everyone in the industry that the market was collapsing. But thanks to lags in the milk pricing system, it's taking months to get the signal to producers to pull back the reins.

December's All-Milk price was $15.90. That's not a great price by recent standards, and not really a profitable price given current feed costs, but hardly low enough to force a correction in the supply, either.

Dairy producers will need to brace for a bitter winter. An extended period of $12 milk (or lower), as futures project, will pinch returns back to the depths suffered throughout 2002–03.

This should bring about the contraction that the market so clearly needs. Dairy producers have been in steady expansion mode for five years, but supply growth has outpaced the market's ability and willingness to absorb everything that is made.

The big unknown is how long and how deep the dairy price correction will be. The futures market foresees only a modest recovery starting at midyear, and a $15 milk price doesn't show up on the board until July 2010. A lot will depend on when the U.S. economy recovers, and when the global economy climbs back, as well.

It's not unrealistic to think the bear market could settle in for a while. In recent years, dairy markets have moved in 18- to 21-month cycles. From May 2007 to October 2008, blocks of cheddar averaged $1.92/lb. In the 18 months prior to that, blocks averaged $1.29/lb.

If that pattern holds, we may not shift back into a cyclical bull market until late spring 2010. Unfortunately, it's a scenario dairy producers must seriously consider.

Bonus content:

Click here for the USDA''s montly "Livestock, Dairy, and Poultry Outlook".

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