Insights: Why So High?
Some folks are asking: Why is the milk price so high? ...for the second consecutive year?
The short answer: Supply and demand. Demand has been outdistancing supply for the past two years-both domestically and internationally. Here's a look see at some of the details.
Milk prices registered a record-shattering high during the first half of last year; about 20% higher than any previous year. During the second half of 2004, milk prices posted their second highest level ever, only exceeded by 1998 prices when the effects of a severe drought were gripping much of the country.
Now, milk prices for the first half of this year were still relatively high; down from last year, but still well above the previous high and more than 20% above the five-year average.
Some milk buyers are quick to blame the system. They cite both cash and futures trading at the Chicago Mercantile Exchange and the federal order mechanisms that calculate minimum prices. Neither the CME nor federal orders are without flaws, but genuine supply and demand are the long-term driving forces for milk and dairy product prices.
Class III milk prices were below $10 per hundredweight nearly half of the time for a period extending from the end of 1999 through mid-2003. Productivity capacity on the farm was zapped; expansion was put on hold. Milk production increased just 0.4% during 2003 and was unchanged from 2003 during 2004.
More recently, milk production looks like this: Output during the first five months of 2005 was up just 1.6% versus production during the same period of 2003. Meanwhile, commercial disappearance during the first five months of this year was 2% greater than during the first five months of 2003. In other words, demand grew more than supply. Commercial disappearance only captures part of the demand side. Significant inventory rebuilding-a reloading of the pipeline between the plant and consumer-was also necessary during the first half of this year. Inventory, by the way, doesn't always get accounted for in USDA surveys.
Domestically, year after year, cheese consumption keeps eating up a bigger share of the milk supply. During the past couple of years, cheese consumption grew 4%. An additional 3.5 billion lbs. of milk went into the cheese vat last year.
On the international side of demand, nonfat dry milk and skim milk powder have taken a big bite out of the U.S. milk supply. Once a burdensome surplus production, dried milk solids are now a hot commodity. More than 258,000 metric tons (570 million lbs) of skim milk powder were exported last year; 75% more than 2003.
The surplus is long gone and exports have kept growing. During January through May of this year, shipments of nonfat dry milk and skim milk powder totaled 150,000 metric tons versus 61,000 metric tons during the same period in 2003.
International buyers are also poised along the border waiting for the U.S. cheese price to slip down to around $1.40. At or just below this price level, they will be placing orders.
Meanwhile, hope springs eternal among some milk buyers. They note that milk production surged 5% above year-ago levels during June. Yes, it did. High milk prices have triggered an expansion. The milk herd is growing and milk production per cow jumped sharply higher during the month.
At this writing, in late July, however, much of the country is being ravaged by extreme heat. Some key milk production and crop production regions are facing a drought. All reports point toward a sharp decline in production per cow, but cow numbers will likely continue to increase.
As milk production registers modest gains, milk prices won't set anymore record highs. On the other hand, relatively strong demand indicates there certainly will not be any new or near record lows.