Milk prices will be better in 2010, but how high will we go, and will it be enough? These are the questions dairy producers are asking themselves at the onset of the new year.
In a January report, USDA is projecting a 2010 average All-Milk price of $16.60, on par with futures prices for the year. In the same report, it projects that corn prices will average $3.70 this marketing year. Put those two together and you've got a respectable year, with slightly greater profitability than the 10-year average of income over feed costs.
But there are so many variables that could impact prices and profitability. Milk production will certainly be lower in 2010—we start the year with approximately 250,000 fewer cows than we had a year earlier—but will supply reductions lead to $20 milk, $16 milk or something less?
Equity has been burned and credit remains tight, so farmers' ability to quickly expand in response to higher prices is questionable.
Overall commodity prices are rising, looking eerily like the rallies that started three years ago. By mid-January, spot prices for Brent crude oil had topped $80/barrel, a 15-month high. Prices have been increasing steadily for nearly a year, accelerating since last fall. Recent price gains for fuel are attributed to large speculators bidding prices higher after the extremely cold start to the winter nationwide.
Meanwhile, the Food and Agriculture Organization's Food Price Index for 2009 neatly parallels the trendline for 2007 (see chart). By December, the index had climbed to 172, up 17% since July, led by runups in sugar and dairy.
For their part, large global dairy players are downplaying the possibility of another 2008-type dairy boom. Monthly prices on Fonterra's closely watched whole milk powder auction slipped 7% in January after almost doubling in the last five months of 2009. The company calls the market more balanced now, crediting the rally to pipeline rebuilding that has been completed.
Apparently, U.S. dairy producers aren't the only ones asking these questions and considering the possibilities. The investment research firm Variant Perception points out that Google searches for "food inflation” have more than doubled in the last three months. Most of the queries are coming from developing countries—Pakistan, South Africa, Singapore and India—where food makes up a large part of consumer spending.
The prospect for runaway inflation is there again, but at this point buyers (and sellers) are more cautious about feeding the fire.
FAO food price index