Milk Glut Spurs Price Slump in Win for U.S. Butter EatersLydia Mulvany
Milk is flowing like never before in the U.S., where dairies have expanded output enough to send wholesale prices plunging from an all-time high in September.
Production in the 12 months through October reached 17.08 billion pounds a month on average, up 1.8 percent from the same period a year earlier, as farmers took advantage of high milk prices and low livestock-feed costs, government data show. At the same time, global supplies are expanding with increased output from top producer New Zealand and the European Union, sending U.S. dairy exports in September to a 19-month low.
The supply boom, fueled by the best profit margins in more than a decade, rebuilt stockpiles eroded by a surge in exports in the first half of 2014. Wholesale-milk futures are down 37 percent from a record 11 weeks ago, reducing costs for buyers including Dean Foods Inc. and Lifeway Foods Inc. Consumers also got a break, with average retail prices for whole milk, butter and cheese dropping in November from a month earlier.
“There’s been a huge milk-supply response in Oceania and in Europe, and that has international prices sharply lower,” said Jerry Dryer, the Delray Beach, Florida-based publisher of the Dairy & Food Market Analyst newsletter. “That in turn started trimming volumes of exports that we could move into the international market, so all that product has backed up in the U.S. and put pressure on prices.”
Domestic milk production in October reached 17.1 billion pounds, up 3.8 percent from the same month in 2013, after touching a record 18.08 billion in May, U.S. Department of Agriculture data show. Output this year will rise 2.5 percent and gain 2.9 percent in 2015, the USDA said yesterday.
Two years of record corn harvests in the U.S. sent grain prices to a five-year low, encouraging farmers to expand the cow herd to 9.28 million head, the most since 2009, USDA data show. Output per animal in October rose 2.9 percent from a year earlier and is heading for the biggest annual average on record.
Benchmark Class III milk futures, a type used in cheese making, closed at $15.90 per 100 pounds today on the Chicago Mercantile Exchange, after touching $15.60, the lowest for a most-active contract since June 2012. Prices reached a record $25.30 on Sept. 25.
Total U.S. dairy exports slid to 148,781 metric tons in September, the lowest since February 2013, USDA data show. Shipments in October totaled 167,740 tons, down 7.5 percent from the same month last year. Milk production in New Zealand, the biggest butter and cheese exporter, rose 11 percent this year through October to almost 16 million tons, according to the Dairy Companies Association of New Zealand.
Milk futures will continue their slide through June, dropping as low as $12, according to Eric Meyer, president of HighGround Dairy, a Chicago-based broker. U.S. output in November and December will be as much as 5 percent higher than a year earlier, and gains in the first half of 2015 will rise 3 percent, he said.
“We’ve heard a lot of reports of discounted milk being shuffled around trying to find a home,” Meyer said. “People are just trying to move the milk because there’s so much of it.”
The output surge may not last. When prices are high, there is an incentive to keep cows longer, even if their milk output drops. Lower profit margins will force farmers to send more cows to beef plants to be slaughtered, reducing milk production, said Knox Jones, an Omaha, Nebraska-based dairy analyst for Advanced Economic Solutions.
With grain prices rallying in the past two months, profit margins are returning to normal after surging earlier this year to the highest since at least 2000, said Brian Gould, a dairy economist at the University of Wisconsin-Madison. Farmers “are very concerned we have this drop in the price,” he said.
Higher retail prices also are forcing consumers to cut back. Dallas-based Dean Foods, the largest U.S. milk processor, said it was forced to charge more to cover the cost of raw-milk purchases that were “unprecedented in our history,” Chief Executive Officer Gregg A. Tanner said on a Nov. 18 conference call. “Recent volume declines have been beyond what we would consider the normal trajectory of the category,” he said.
Supplies are improving, which means milk costs will moderate into next year, Tanner said.
The decline may be precipitous, according to Morton Grove, Illinois-based Lifeway, a maker of milk-based products including kefir. Prices are “definitely on a good downward trend,” Chief Financial Officer Edward Smolyansky said on a Nov. 10 earnings call.
Dairy farmer Ben Peterson, who has 780 cows in Grantsburg, Wisconsin, said the windfall from high prices allowed him to pay off debt and build cash reserves as the market shifts to more ample supply.
“We’re ready for a downturn,” Peterson said. “This is what keeps everybody lean, and keeps the cost of production down.”