When Will Raw Milk Prices Come Down?
November 1, 2007
When Will Raw Milk Prices Come Down?
The answer to that question, if known and properly acted upon, will separate the good and, yes, the lucky managers from the general field. We are currently on the upside (probably near the peak) of a cycle, which means today’s high milk prices will be followed by lower prices. The major question is when? This cycle looks, feels and, I believe, will be different from historical milk price cycles.
Traditionally, U.S. milk pricing cycles have been driven by conditions in the United States, to which U.S. dairy farmers have reacted by either increasing or decreasing production. Historically, it takes about 12 months following a period of abnormally high or low raw milk prices for production to increase or decrease sufficiently to reverse the cycle. Usually milk price cycles result from conditions affecting milk production in the U.S. and are not externally driven, e.g., high or low feed costs, plentiful rains or droughts, high or low beef prices, etc. Sometimes high prices were a result of government actions — efforts to set high milk support prices, and inflation-adjust them every six months, or occasions when USDA exported too much butter or NFDM shorting the domestic market and driving prices up.
The cyclical force was almost always supply driven and based on market or policy conditions in the U.S. — but not so anymore!
Many of us have talked about globalization for several years, but this year we are looking it in the eye, and getting to know it up close and personal.
For the first time this cycle reflects worldwide changes in milk production and consumption of dairy products. Although it is cyclical, I believe it is ushering in a new higher global raw milk price surface that will be significantly higher than world market prices have been traditionally.
Rapidly growing economies in many developing countries like China, Russia, India and Malaysia are resulting in a significant increase in the demand for dairy products and, in most cases, milk production in those countries is not and will not keep pace with their demand for years to come. They will be net importers of dairy products for many years.
Additionally, the restructuring of the European Union’s intervention milk pricing program and the elimination of its export subsidies will likely result in less milk being produced in EU countries and less downward pressure from export subsidies on world market milk prices.
At these high world market prices, world milk production will increase significantly, albeit not sufficiently to bring world market prices down to previous price surfaces. Going forward, the U.S. price surface and world market prices are likely to be about equal.
I expect raw world milk prices to normalize with a price surface in the $12.25 to $13.25/cwt range beginning in 2009. World raw milk prices are estimated to have averaged between $10 and $11 in 2005 and 2006 but jumped to about $19 this year and will continue high through 2008. Prior to 2005, raw world prices probably ranged between $7 and $10.
So there you have the answer — or at least one person’s speculation about when milk prices may settle at a new global price surface.
Tip Tipton, chairman and chief executive officer of the Washington, D.C.-based Tipton Group, is the former CEO of the International Dairy Foods Association.
Roy stout: 1920-2007
Roy C. Stout, 87, former sales manager for Greens Dairy & Cloverleaf Frozen Foods, York, Pa., and recently a retail consultant to Isaly Klondike Co., Tampa, Fla., died Sept. 28. Stout began working in the ice cream industry with Isaly’s Dairy in Ohio in the late 1930s. Later, Stout worked for the C. Nelson Cabinet Co. of St Louis and Kari Kold Cabinet of Grand Rapids, Mich. He returned to ice cream when he joined Green’s Dairy in 1959. He retired in 1985 and relocated to Florida, but continued to consult for Klondike and Good Humor. During this time, Stout was a key figure in the Chesapeake Dairy Mixers, Keystone Association of Ice Cream Manufactures and Association of Ice Cream Manufacturers of the Mid-Atlantic States. At an ice cream convention in Florida he was asked what his best moments were in the industry, and Stout replied, “Taking the Klondike bar national.”