Currency shifts devastated milk in 2008, but exports fueled rebound
By MATEUSZ PERKOWSKI
Uncertainty about the direction of milk prices versus feed prices has haunted the dairy industry in 2011, leaving farmers on uneven financial footing.
At least one factor has remained constant, though. Experts say the industry's fortunes are clearly linked to the supply and demand for dairy products overseas.
"The key point we're trying to emphasize is the global market is becoming a very big driver in the price of milk," said Tim Hunt, global dairy analyst for the Rabobank financial services company.
The dairy industry's dependence on exports is regarded with caution these days, since memories of the crash in milk prices in 2008 and 2009 are still fresh in everyone's mind, said Leslie Butler, an agricultural economist specializing in dairy at the University of California-Davis.
"The dairy industry came to over-rely on the export business," Butler said. "It's now viewed as a more risky proposition."
When the value of the U.S. dollar climbed in 2008 after the financial crisis, domestic dairy products became more expensive in global markets. At the same time, demand ebbed in China and India, he said.
"All of the sudden, we have 10 percent too much milk," Butler said -- the amount of U.S. dairy production exported.
Even a much smaller oversupply is apt to send milk prices falling, and in short order the price dropped from roughly $20 per hundredweight to about $10, he said.
That sudden plunge sent shock waves through the industry, Butler said. For example, roughly 15 percent of the dairy farms in California have shut down in the past three years.
With the dollar once again weak against many key currencies, exports have resumed their vital role -- the amount of domestic production headed overseas is now hovering between 8 and 9 percent, he said.
Milk prices have also grown stronger, reaching about $17 per hundredweight in early spring, Butler said.
However, most of that added cash is consumed by higher feed prices and the increasing cost of production.
"It's very good prices relative to history but not relative to what's going on in the corn and bean side," said Brian Gould, an agricultural economist specializing in dairy at the University of Wisconsin. Corn and soybean prices are at historic highs.
Milk production in the U.S. has been trending up by about 1 to 2 percent year over year, which generally puts downward pressure on prices, he said.
"We're going to have more milk coming onboard," Gould said. "Our rate of growth in production is greater than our rate of growth in population."
Global demand for dairy products appeared to rise steadily during early 2011, but more recently, there have been indicators of stagnation, Butler said.
Domestically, the industry is in a seasonal cycle in which dairy cows are typically the most productive while consumer milk consumption begins dropping off as temperatures rise, he said.
"It's a well-established trend," Butler said.
Globally, prices for nonfat dry milk -- an important end product and price determinant for farmers -- began to plateau on a major auction in New Zealand that's seen as a gauge of world markets, he said.
"It's a very uncertain environment at the moment," Butler said.
Several factors have caused nervousness in the worldwide markets for dairy products, Hunt said.
Notably, political unrest in the Middle East and Africa has prompted concerns about their ability to import milk, he said. Similar worries surround the earthquake, tsunami and nuclear crisis in Japan.
"Instability causes confusion," Hunt said. "The market finds it harder to digest."
The effect of these disturbances may actually end up bolstering milk demand, however, Hunt said.
In the Middle East and Africa, government officials are focused on preventing shortages of dairy products and other foods to prevent further social unrest, he said.
In Japan, damage to ports and roads may stall imports in the short term, but the loss of domestic dairy production may ultimately prompt the country to buy more on the world market, Hunt said.
Major consuming countries, such as China, Russia and India, are also finding themselves short of milk, he said. For example, India -- which has traditionally frowned on dairy imports in favor of self-sufficiency -- has opened up to powdered milk and butter.
"As this market noise clears, the fundamentals are supportive of high dairy prices on world markets and hence in the U.S. also," Hunt said.