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Economics with Ken Bailey
By Ken Bailey
University of Missouri-Columbia
Extension Dairy Economist

Dairy Commodity Market News

The dairy commodity markets are relatively stable at the moment, showing slight signs of weakness with Spring break at our nation's schools and the coming spring flush. Most folks ask when will milk prices start to show real price strength. That depends almost entirely on demand for dairy products in the weeks ahead. Cheese prices are steady to weak due to relatively high inventory levels and lack luster demand. Prices are likely to rise once we are past the spring flush and demand for processed cheese
picks up.

Background
Two factors drove relatively high milk prices the first three quarters of 1996: scarcity of milk and high demand. Milk production actually fell below year-ago levels as farmers faced high feed costs (see Table 1). The USDA's milk-to-feed price ratio reflected this cost-price squeeze. Production fell April through September. At the same time, demand for dairy products was strong. Consumption of cheese and fluid milk products looked promising. As a result, prices for 40-pound blocks of cheese rose from $1.40 per pound in January to $1.70 by the fall. Butter prices followed suit (see graph below).

High dairy commodity prices resulted in a historic rise in the Basic Formula Price (BFP), from $12.73 in January to $15.37 in September. The BFP, the mover of most federal order prices, resulted in historic gains in farm-gate milk prices. But what happened next is only how being revealed. Demand for dairy products, usually strong during the holiday season, fell.

Commercial disappearance of American cheese fell 4-5 percent from a year ago during the first three quarters to just 1.5 percent the last quarter (see Table). Retailers were unable to pass the high costs of cheese on to consumers. As a result, inventories, which usually decline the last quarter, remained high (see graph below). Inventories of American cheese stuck at 380 million pounds. That inventory weighed heavy on cheese prices which plummeted to $1.19 per pound by early January of this year (see graph below). The impact on farm-gate prices was severe and immediate.

Table 1. Change in Milk Production and Commercial Disappearance from 1996


	1st Qtr	2nd Qtr	3rd Qtr	4th Qtr	Year
	% change from last year
Milk Production	0.3	-2.2	-1.7	0.2	-1.0
Commercial disappearance:
- Butter	-2.6	4.6	-8.0	1.2	-1.4
- American Cheese	4.3	4.8	4.0	1.5	2.7
- Other Cheese	0.5	1.5	3.8	1.4	1.8
- Nonfat Dry Milk	6.9	31.5	-13.4	-5.3	8.1
- Fluid Milk Products	0.8	0.9	1.1	1.0	1.0
Source: USDA, AMS

Milk Production in 1997
The level of milk production over the next few months will have a significant impact on milk prices. Cow numbers, which declined about 1 percent in 1996, continue to decline. Milk production per cow, on the other hand, has been relatively good. As a result, milk production in January was up just 0.6 percent relative to a year ago and February milk production (on a daily average basis) was up 2 percent.

At issue is what will milk production do during the spring flush. On the one hand, USDA's dire predictions that a bad winter would dampen Western milk production has not been realized. Milk production in California was up 4 percent in February. And, production in Idaho, New Mexico and Arizona have been growing at double-digit rates. Midwestern producers, on the other hand, have faced poor forage quality and high costs for protein and hay. Thin cows may produce another restricted spring flush.

The outlook in 1997 is for milk production to grow about 1 percent with cow numbers declining 1 percent. This forecast depends on a reasonable spring flush and reasonable feed costs.

Market Demand
Prices for 40-pound blocks on the National Cheese Exchange have risen from $1.275 per pound in early January to $1.325 by mid- March. Prices fell a penny the last week of March due to greater quantities of available milk due to Spring break in our nation's schools. The futures markets indicate that cheese prices may weaken to $1.30 per pound. Thereafter prices will likely rise as summer heat depresses milk production. Prices will likely peak sometime in September in the range of $1.40-$1.50.

Butter prices have also been on a roller coaster. AA butter prices at the Chicago Mercantile Exchange rose from 90 cents per pound to $1.16 by the end of March. Commercial butter stocks in 1996 averaged 51 percent below 1995 levels. And, butter stocks the first two months of this year were 23 percent below a year ago. At first glance this doesn't make sense. Butter production in 1996 was only 7 percent below a year ago and consumption of butter was down just 1.4 percent. What appears to be happening is that butter plants are not attracting enough cream and industry is not willing to hold the stocks it once did. Butter prices will therefore continue to fluctuate widely.

Outlook
Price outlook in 1997 will be driven almost entirely by demand. If demand picks up steam in the months ahead, milk prices will strengthen. Projections of consumption per person were provided by the National Milk Producer Federation (see Table).

Table 2. U.S. Per Capita Consumption of Selected Dairy Products


	Total Milk	Product Pounds
	(me, tsb)	Fluid	Cheese	Butter
1975	519.5	246.5	14.1	4.4
1980	523.6	233.3	17.0	3.9
1985	544.3	226.7	20.2	3.9
1990	575.8	219.6	24.9	3.7
1991	571.6	219.2	25.0	3.6
1992	577.3	216.7	26.3	3.7
1993	575.9	213.6	26.6	4.1
1994	586.5	212.1	27.3	4.2
1995	591.5	209.5	27.9	4.5
1996*	590.8	208.4	28.2	4.4
1997**	593.1	206.6	29.2	4.2
1998**	596.1	204.8	29.9	4.2

* Preliminary; ** Projected me = milk equivalent; tsb = total solids basis Source: National Milk Producers Federation

The numbers indicate that overall, demand for milk per person will likely grow a modest 0.4 percent in 1997. Add in the growth in population and overall consumption is projected to be up between 1 and 2 percent. Fluid milk consumption will continue to decline on a per person basis as declines in whole milk consumption are now offset enough by gains in low fat milk. Cheese consumption is expected to continue to grow. And butter consumption will be stagnant due to high and fluctuating prices.

Overall we are projecting the BFP to average $12.80 per cwt for 1997. That compares to an average $11.82 for 1995 (a bad price year) and $13.38 for last year (a good price year). The bottom line is prices will move with consumption. If total milk consumption averages just 1 percent, look for prices to be at or slightly below our projections. However, if consumption is between 1.5 and 2.0 percent for 1997, prices could quickly rise above our projections.

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