Dairy Excel: Milk prices: Dairy expert searches for 2003 rays of pricing sunshine

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Are better milk prices on the way? Let’s hope so!

In my last column (November 2002) I took a look at milk prices for 2003 and I was not very optimistic. At this point in 2003 I must confess that I remain a bit more pessimistic than optimistic.

Now, before you say to yourself, “Here he goes again with another dismal price forecast,” and then turn to another column, I want to tell you that in this column I am going to look for what rays of pricing sunshine there may be come the remainder of 2003.

Hopeful search. What possible changes may there be to pull us out of these rock-bottom price blues and get things moving again?

Imbalance. First, a little taking stock of what has us in this predicament. Too much supply and too little effective demand. It’s that simple.

So what do we need to rectify this imbalance?

Either we must get supply throttled back or we must get demand going again. Preferably accomplishing both at the same time is a winner.

And the sooner this takes place, the better for all in the industry.

Supply side. Let’s look at the supply side for a moment.

First, notice that I said supply and not production. Supply is the sum of current production plus current inventory plus net imports.

It is supply that is the scalawag here and not just production.

Production. Low milk prices will slow down production from our milk farms, always has and always will. The question that seems to have everyone scratching heads is “how fast?”

The answer of course is that nobody really seems to know.

As the farm production side of the industry has changed, both in size and in technology, so has the response of slowing milk production to low prices.

You can count on this. With milk prices at this low level or even sliding into the lower $9 range you can bet your uncle that the annual rate of milk production will be falling and even become negative for a period of two to three quarters down the road.

When that happens, milk prices will begin to rebound in earnest.

Other contributors. Now what about the other contributors to supply, for example, inventories and net imports.

Let’s consider inventories first.

The latest USDA Cold Storage Report and Chicago Mercantile Exchange tell us we have significant quantities of storable dairy products on hand.

Big three. Cheese, butter and nonfat dry milk all are in abundance at this time. This abundance will begin to dissipate as domestic milk production begins to show a downturn in the rate of flow.

Once the official reports show a significant decline in inventory numbers, milk prices will begin their rebound.

Cheese is the one to watch as its inventory level is not as nearly burdensome as it is for butter.

Nonfat dry milk is, as it is said, “strictly a horse of a different color.” Uncommitted inventory owned by the government storehouse, Commodity Credit Corporation, still exceeds one billion pounds.

Net imports. Net imports are the result of subtracting export volumes from import volumes.

As an industry we are not a major player in the dairy product export world so that means we focus our attention on imports.

Recent meeting. By now we have all heard about the flow of raw milk into the United States from non-quota farms in Canada. This was the topic at a recent Ohio Dairy Industry Task Force meeting.

This issue was discussed in detail. From what I learned at that meeting, this is an important issue but one that may be losing steam as Canada closes down the operations from which this milk has been flowing.

If this is correct, then all is well and good.

If not, then even though the quantities of milk are small, this is an activity that cannot be sanctioned and allowed to continue.

If we are going to continue to support the price of milk, and the U.S. Congress in the 2002 Agricultural Act reaffirmed that we are, then we cannot have raw milk from outside our borders flowing in and being transformed into dairy products.

This is milk that truly does displace milk being produced here at home.

MPCs. The other contentious issue with imports is of course the milk protein concentrate or MPCs.

I have heard it stated that these are displacing milk produced here at home but confess that I have a difficult time sorting this one out.

If, as is often stated, MPCs are a direct substitute for our skim milk powder, I do not see how they are displacing anything.

Commodity Credit Corporation is purchasing, at the announced support price, all of the skim milk powder that the industry can supply, and having to store the product. Nothing is being displaced.

Commodity Credit Corporation on behalf of the U.S. taxpayer, is having to pay too much for a derivative product that can be brought in off-shore at a much lower price.

Real issue. I think that the real problem here is that the support price on nonfat dry milk is too high, even at 80 cents per pound.

Until we change our national commitment to support the price of milk at $9.90 per hundredweight, I do not see an easy solution to this one.

Demand side. Now let’s look at the demand side of the system. As we wait for low milk prices to throttle back the milk production engine in the United States, what can be expected on the demand account?

First and foremost we must have surplus dairy inventory moving to Commodity Credit Corporation.

We cannot have a dairy pricing program, with its support price for milk of $9.90 that in reality moves no product to the public storeroom.

If surplus butter and cheese will not move to Commodity Credit Corporation at announced support prices but instead only moves when those prices are discounted by 8 to 10 cents and then only after an extended period of time at those levels, then we have in reality a support price for milk in the mid-$8 range.

If, as has been reported, surplus product does not move to the Commodity Credit Corporation because of the cost of doing business with the government and a mismatch between what the corporation specifies as to product grade and standard and what is being commercially produced, then Commodity Credit Corporation should change its procedures to facilitate quick movement of product at announced support prices.

If the announced milk support price of $9.90 is too high, then let us have an open debate on this issue and make changes if that is the political will, but let us end this charade of an announced price of $9.90 but an effective one closer to $8.50.

Working magic. So, there you have it. The current low price will work its magic on domestic production.

It will take time, but it will happen.

And for some it will be painful. Low prices will also make imports into the United States less attractive and this too will slow down the production side.

If surplus product would start moving to Commodity Credit Corporation in earnest, this would do a great deal to get milk prices back up by a dollar or two.

Look for both. I look for both the slowing of the production engine and the absorption of surplus stocks by Commodity Credit Corporation to coincide by early summer and expect market prices to begin to increase toward more average levels.

If these do come together, then you can expect to see Class III prices rise by a couple of dollars after the flush of the year.

Positive look. Let’s stay positive. For an up-to-date 2003 forecast of dairy product prices, component prices and Federal Order Class prices, please connect to: http://aede.osu.edu/programs/ohiodairy.

(The author is a dairy marketing and policy state specialist with Ohio State University Extension. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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