Buckle Your Seat Belt
If you hadn't buckled your seat belt before cheese and butter prices raced above two dollars, you better do so now.
The trip has just begun. The next leg of the journey won't necessarily be a leave-your-stomach-at-the-top-of-the-hill kind of ride. The cheese and butter markets aren't about to collapse.
Yes, cheese and butter prices have backed off their highs of late March. But remember: The cheese price had shattered all previous highs and the butter price had approached its previous high. The thrust of these higher product prices is still being felt in Class I prices.
Meanwhile, the skim milk powder and whey markets have pulled out onto the highway of higher prices. These higher milk and product prices are being driven, in part, by higher feed costs and higher beef prices.
Higher beef prices put a dent in the fender called milk cow numbers. Higher feed costs put a dent in the fender called production per cow. Meanwhile, a host of other price increases are, and will continue to, dent more fenders.
In early May, when I wrote this document: The oil price had been ramping up for several months and was at a 13-year high. It was costing more to move milk to the plant and more to get finished products from the plant to the store. It was costing more to run the plant. Packaging costs were climbing as resin and paper pulp prices marched higher. There's more to come.
Prices of a host of other products and services are moving higher. Natural gas prices are up 20% during the past 18 months. Steel and several other metals, rubber, industrial equipment and capital goods are getting more pricy. Airline tickets and lodging costs are making it more expensive to keep a sales staff on the road.
As these basics cost more, consumer goods prices are advancing. On an annualized basis, the consumer price index was up more than 5% during the first quarter of this year. In the supermarket, it's not just the beef which has been high for more than a year. Dairy prices have been in the headlines, but pork, poultry, eggs and produce prices are all moving up the highway called inflation. There's likely more to come.
"I don't think we look at 2004, to be down," Keith Collins, USDA chief economist told the Washington Post a month ago, when asked about farm and food prices. I fully agree.
Look beyond the USA. Some things, like shoes, clothing and computers, aren't costing more (at least not much more), because of low cost suppliers overseas. Sooner or later; however, the cheap dollar will pull these prices into the inflationary lane.
On the flip side, the cheap dollar makes U.S. goods a better buy overseas. Any softening in U.S. dairy prices, for example, will likely trigger additional orders from overseas customers for a couple of reasons. Over the past decade, we've done a great job of creating markets around the world and key competitors-Oceania and Europe-don't have any excess dairy products hanging over the world market at relatively low prices.
U.S. export sales may not grow much this year simply because we don't have product to ship. Imports, which have tempered domestic dairy price increases in the past, won't be landing at U.S. ports either. The product isn't available.
Meanwhile, China and a host of other developing economies have developed a serious appetite for feed grains and foodstuffs. They will be serious competitors for available supplies of both.
Buckle your seat beat. This journey has just gotten underway. It won't do much good to get out your Global Positioning System device. The satellites may not have changed positions, but the stars are lined up much differently. Higher, and increasing, basic commodity costs are here for the foreseeable future.
Milk and dairy product prices won't hang out at their record shattering highs of earlier this year, but they will hover above the five- and ten-year averages; probably for a couple of more years.