The soaring dairy prices that have sustained dairy farmers and dismayed consumers over the last year are showing signs of easing.
American milk and cheese prices reached record highs in the first quarter of 2014, driven by strong demand from China, Southeast Asia and Mexico. The boost has made dairy farming profitable again after half a decade of barely break-even prices, but it has also brought the price of a gallon of milk to $3.89, the highest in over two years.
“I can’t believe it’s going to stay this good,” said David Wood, who operates a dairy farm with more than 900 cows in Saratoga County, New York. “It never has, so I don’t think it will this time either.”
Overall demand for dairy is expected to continue to expand with the world’s population, but farmers like Wood know that high prices also encourage higher production, which will eventually bring down prices. After six consecutive months of rising consumer dairy prices, international prices fell 9 percent in April.
Jerry Dryer, editor of the Dairy and Food Market Analyst, said that the tumbling prices were the result of both supply increases and reduced price pressure from China. Milk flooded in from New Zealand as its grazing season came to an end, and production was up in other countries, he said.
“The Chinese have backed away from the market after pretty aggressive buying,” said Dryer. “But demand in most of the world is good and the Chinese demand will resume.”
In the short term, buyers that were forced out of the market by high Chinese bids will keep prices healthy until at least the end of the year, said Dryer. Seasonal slowdowns in some countries will also prevent a sudden price drop, but in the long term prices will decline gradually as producers respond to the lucrative dairy market by adding cows.
“It won’t be a crash,” said Dryer. “I’m anticipating a soft landing.”
U.S. production is also projected to ramp up, but American farmers have been slow to react to price increases after a painful period in 2009 when oversupply and stagnant demand cut prices by more than 50 percent. Some farmers sold their milk cows at a loss, while others took on debt to purchase feed at high prices, losing money on each animal.
“It was a big thing,” said Wood. “You had to go from a good checking account to a minus, and then you had to get the money you needed to continue.”
As prices picked up over the last year, many farmers used the profits to pay off those 5-year-old debts or purchase long-overdue equipment upgrades instead of expanding their operations, said Wood. Farmers are doing their best to increase production and take advantage of the high prices, but cow prices are at their highest level in five years and many farmers remember how quickly the market turned after record high prices in the summer of 2008, he said.
“It’s nice to have a good cash flow, but it’s not good in the long run, because it’s going to swing the other way,” said Wood. “I hope I’m wrong, but I’m probably not.”
Dairy markets in the United States have only recently been exposed to price fluctuations abroad. Dairy exports overtook imports in 2007 and surpassed $5 billion for the first time last year, according to the U.S. Department of Agriculture Foreign Agricultural Service. Last year, about 19 percent of all dairy products were exported, compared to 11 percent in 2005.
“The path to growth has been the overseas market for the last few years,” said Alan Levitt, vice president of communications and market analysis for the U.S. Dairy Exports Council. “It’s not just the quantity, it’s the amount that China is willing to pay.”
China’s powdered milk imports more than tripled at the end of 2013, driven by low at-home production, demographic shifts and a growing middle class with more protein-filled diets, said Levitt. U.S. dairy farmers have taken up the slack as demand has outpaced production capability by traditional milk exporters in the European Union and New Zealand.
“It’s relatively new, so people are still trying to figure out how everything connects and what drives what,” said Levitt.
In the U.S., where minimum dairy prices are set by federal formulas, international price changes can have far-reaching effects. The minimum price of Class I milk, which is sold as a beverage, is determined in part by market price data for Class IV milk, which is used to make the dry milk products that are a major component of international trade. Foreign demand for dry milk and cheese can set a higher price floor for all American dairy goods.
Companies that rely on milk products, like The Hershey Company, Starbucks Coffee Company and Domino’s Pizza, reported concerns about high dairy inflation in earnings calls in April and May.
“Dairy exports in general have been up and that’s driven the demand side overall on this,” said Dominos CEO J. Patrick Doyle. “Our expectation is that it’s going to continue to ease, but it’s going to take some time for that.”
Although retailers may swallow price increases in dairy products over the short term, if it becomes clear that high prices are part of a longer trend the retailer will pass on the cost, said Bryan Gould of the Wisconsin Center for Dairy Research.
“It’s a very watered-down effect,” said Gould. “Retailers are reluctant to increase prices if they view this as a short run phenomenon, so it depends on their expectations.”
High prices may be good for farmers now, but down the road they can erode demand if consumers start looking for substitutes. If prices stay high for too long, they can also encourage buyers in less developed markets to start their own operations instead of importing from American farmers, said Levitt. In Saratoga County, Wood said that although the dairy business is growing in some import markets, he expects American farmers to continue producing milk for the world for many years to come.
“It’s always been an individual business without many guarantees, and that’s what got us to where we are today,” he said. “We’ve learned to produce milk for cheaper, and that’s put us in a good place with the rest of the world. I think we’ll have a step up for quite a long time.”