Milk prices have continued to increase in the US, hitting $19 per hundredweight in September. But will the positive impact on dairy sector cash flow outweigh the long term negative effect on consumption? US commodities expert and MilkPrice blogger, John Geuss, gave DairyReporter.com a breakdown of September’s dairy commodity price movements….
On October 3, September Class and Component Milk Prices were announced. Class III prices were exactly $19/cwt up $1.27 from the prior month. During the last month, prices for cheese, butter, and dry whey have moved up rapidly, positively impacting all the dairy financial statistics concerning milk revenue.
The increases are positive for improved dairy cash flow, but high dairy milk prices can also have a long term negative impact on consumption. A section below analyzes the impact of high milk prices on retail cheese prices which in turn negatively influence consumption.
The 8% increase in butter prices vs. the 5% increase in cheese prices held protein to only a 4% gain. This relationship can be reviewed in the August 8, 2010 post to this blog.
All three component prices are running above their historic levels. As Chart 2 shows, the value of other solids is becoming a factor. The other solids value is calculated based on dry whey prices and are therefore linked to cheese production and whey demand.
Payment for protein remains the dominate part of the milk check. This relationship has been consistent for a long time and reinforces the growing importance of cheese as well as the need for higher levels of milk protein. The producers’ best strategy is to do everything possible to increase protein production.
Why is $20 per cwt milk not good for the dairy industry?
In 2007, when milk prices reached $20/cwt, producers received a nice bump in their revenue line. As we know, this was quickly followed by a severe drop in milk prices. Part of this was the sudden changes in exchange rates which negatively impacted the U.S. export competitiveness, but there was also a negative impact on domestic consumption which decreased demand for cheese.
As can be seen in Chart 4, the high milk prices forced cheese makers to increase their prices which of course lead to an increase in the retail price of cheese. That increase resulted in a drop of 2% in per capita consumption which has never recovered.
Following the 2008 drop in consumption, the long term trend of increasing cheese consumption continued but at a slower rate as illustrated in Chart 5. There have been additional price increases in 2010 and 2011. The drop in consumption and slower growth rate now account for a 5% decrease in domestic consumption as compared to where consumption would be if the growth trend prior to 2007 had continued.
The conclusion is obvious. High prices for milk will dampen demand in the long term and therefore hurt long term demand for dairy products. This leads to increased volatility in milk prices.
Because the price of Class III milk is linked closely to the price of cheese (see blog post for April 23, 2009 ), everything that influences the price of cheese directly influences the price of milk.
The remainder of this post covers movements in the parameters that determine the price of milk. The most impactful is cheese, followed by butter, and dry whey. They will be reviewed in that order.
For part two of John’s monthly commodities update and a look ahead to October, visit www.dairyreporter.com on Thursday 11 October 2012.
You can see John’s month-to-month dairy commodity breakdown at his blog, MilkPrice .