Bailey: Markets Correcting Themselves

Thursday, September 4, 2008 7:50 AM CDT

“The market is clearly moving in a bearish direction,” says Penn State University Economist Ken Bailey. “When the dollar began to stabilize and corn prices declined, most dairy commodities became weaker. Cash cheese prices took the first hit, with prices declining from $2 per pound down to $1.70. Nonfat dry milk has remained steady at around $1.40, and dry whey prices are much weaker.

“The market was convinced that we were going to export a lot of cheese, and thus was bullish about prices,” Bailey continues. “In fact, we did export cheese, but as a percentage of production, the amount was small.”

And, market fundamentals simply did not support a continuation of $2 cheese, the economist says. The exception to the bearish news is butter.

“Butter prices remain very firm, at above $1.60 per pound. Even the futures look promising for butter. The deal is we have been exporting a lot of butter, international demand looks good, and the volume is significant relative to domestic production,” Bailey remarks.

In looking ahead there are three things to consider, according to Bailey. First, the milk supply is important. Despite the rise in July cow numbers, he expects milk production to slow. That should tighten the market. Offsetting that is the exchange rate and the U.S.’ potential to hold onto existing export levels.

Third are corn and soybean meal prices. Corn is still an expensive commodity and hay prices are rising.

“If the markets can teach us anything, it is that they always correct themselves and prices never stay high forever,” Bailey observes. “Oil prices rose, but then fell due to changing markets. Exchange rates finally bottomed out. And corn prices are now moderating. Thus, any assumptions that milk prices will remain high from now on are misplaced. Setting a price, monitoring the market, and hedging when appropriate is a good marketing plan that will work in up-and-down markets.”

July milk production for the 23 surveyed states was up 1.7 percent from a year ago.

“This was not surprising, as I was predicting a slowdown in production growth,” Bailey comments. “What was surprising was the USDA’s estimate that cow numbers continued to grow, but milk yields were depressed.”

Looking at the numbers, California stood out, says the economist. Cow numbers grew from 1.816 million in July of 2007 to 1.846 million in 2008. Milk yield fell 50 pounds per cow from 2007 to 2008.

So is the forecast of decreasing cow numbers wrong?

“Not necessarily,” says Bailey. “The USDA is good at estimating milk production, not so good at figuring out how much of this is cows and how much is yield. If milk growth next month is still under two percent, my forecast is still valid.”

The financial and commodities markets had a reversal during July and August, led by declining crude oil prices and the rising value of the U.S. dollar. At the same time, there was a major downward correction in corn futures prices.

“All three corrections represent a double-edged sword for the U.S. dairy industry,” says Bailey. “Lower oil and corn prices represent lower input costs for milk production. That means costs for planting and harvesting crops are now lower. However, lower corn prices result in lower milk futures as traders surmise that there will be plenty of milk. And a higher dollar puts pressure on milk and dairy commodity prices, since it is expected that export prices denominated in dollars will be lower.”

Members comment

The Global Dairy Platform strategy and action plan have elicited strong support and commitment from members. Henrik Jørgen Andersen, head of corporate research for Arla Foods, Denmark, says, “Dairy products are considered basic foods in almost all developed dairy markets. Despite this, during the past three to four decades, dairy products have suffered from not being the obvious choice in terms of different health agendas, especially due to the milk fat issue. Unfortunately, this has placed the reputation of dairy products in direct competition with several dairy substitute products.”

The formation of Global Dairy Platform and its recently published three-year strategy gives the global dairy community “for the first time, greatly needed tools to change this situation,” says Andersen. “These tools will restore dairy products high on the global health agendas through scientific-based evidence regarding the importance of dairy products, either directly or indirectly as a substantial part of the daily diet. This will give the dairy community new possibilities in marketing dairy products that both give consumers choices, which influence their diet in a way that would be beneficial to health, and counteract the dramatic progress in lifestyle diseases in both developing and developed dairy markets.”

Gregory Miller, executive vice president of research, regulatory and scientific affairs for Dairy Management Inc. (DMI), says, “I think Global Dairy Platform has done a really good job of getting focused on some key and important issues for the dairy industry, not only in the U.S., but also worldwide. I am very excited that GDP is going to be there to provide support in terms of networking, insight and guidance. I hope that in terms of guidance, this means GDP will push the industry forward on some of these key issues.

“I think GDP has done a good job of saying there are some areas we need to act upon quickly, like nutrient richness and function, and some longer-term issues, such as weight control and blood pressure management,” he continues. “Those are real key opportunities for us.”

Miller says the dairy industry has “done a good job helping consumers understand dairy foods as an excellent source of calcium, but we haven’t done as good a job in helping them understand the whole nutrient package that dairy delivers in health and wellness. And it’s important right now because, while consumers want taste, convenience and good pricing, they also want healthfulness…They are making food decision choices based on the healthfulness in those food products.”

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