Dairy markets are riding the high of very tight global supplies of dairy products and very strong demand for milk powder.

Spot cheddar cheese prices are at six-year highs, with blocks closing at $2.20 a pound and barrels at $2.16 a pound Jan. 10. Those prices are 15.75 cents and 24 cents higher, respectively, than the previous week.

Cash prices for Grade A nonfat dry milk are running $2.07 a pound, up slightly from the previous week. Cash butter prices, at $1.675 a pound, are up 10.5 cents from the previous week.

Dairy markets “are crazy,” said Sarina Sharp, market analyst for Daily Dairy Report.

Demand for milk powder is leading the surge in dairy markets, and China is the big elephant in the room, she said.

China’s dairy imports are at record-high volumes, particularly powder used primarily for infant formula but also to reconstitute for fluid milk consumption. A growing middle class there means more demand out of Southeast Asia, she said.

Global stocks of dairy products are very tight and keeping product prices high, she said.

In general, adverse weather in Europe and New Zealand and high feed costs in major exporting regions in 2013 restricted global milk production, especially in the first half of the year. U.S. production in January through November of 2013 was only slightly higher than 2012, she said.

In addition, New Zealand had been exporting at a strong pace, with already low inventories that were further depleted when the drought hit at this time last year.

The U.S. has benefited from the global deficit, exporting almost 16 percent of domestic milk production in January through November in 2013, with cheese exports at record highs in November and butter exports near record highs for the past few months, she said.

China’s huge appetite for powder is also leaving less milk for cheese, but the U.S. has continued to produce cheese, benefiting from the demand. The U.S. price for cheese, however, is now higher than the world price, and exports will likely slow down in the next couple of months, she said.

The global demand also has milk prices at very high levels, she said.

Class III futures prices for milk going into cheese vats are approaching $21 per hundredweight for January and February and will stay high in the near term, given demand. The futures market projects those highs will moderate a little lower every month as producers respond to better margins over feed costs and increase production, she said.

Class IV prices for milk to manufacture powder and butter are even higher than Class III. Class IV futures prices are $1 or more per hundredweight higher than Class III futures for January through August and higher by a still sizable margin for the rest of 2014, she said.

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