Dairy prices look favorable for 2014, but anything could happen

As the new year begins, it is tempting to start guessing what it will bring. Perhaps this can be done for the weather (doubtful) or for college football (even more doubtful), but over the years I have learned that it cannot be done for milk prices. One would have to predict the unpredictable.

Washington on vacation

A year ago, nearly everyone would have guessed that by now we certainly would have a farm bill. But never underestimate the power of stupid people in large groups: no farm bill for now!

Milk pricing for now

For the time being, the price that dairy producers receive for their milk is entirely driven by the wholesale prices of four dairy commodities: butter, nonfat dried milk, cheddar cheese and dried whey.

Just a few months ago, as domestic inventories of dairy products, particularly butter and cheese, were mounting, some dairy economists started blowing their “milk prices to crash” horns.

Meanwhile, U.S. exports of dairy products kept growing to levels never seen before: Around 17 percent of our national milk solids production in 2013 will have been exported.

Last August, an eminent dairy economist issued the opinion that exports would come to a screeching halt as soon as dairy production would get in gears in Oceania. Here we are four months later, and New Zealand’s dairy production is in full swing — up 5.4 percent from October 2012 and 9.2 percent greater than October 2011.

Strong demand

Yet, the United States is still exporting dairy products at unprecedented rates because it remains a low-cost provider. The world demand for dairy products is strong.

This world demand is to a large extent responsible for the strong domestic prices currently received by our dairy producers.

Not a bubble

A bubble requires some sort of incoherent exuberance. That’s not what is happening. Last week, spot cheddar blocks on the Chicago Mercantile Exchange (CME) market settled near $2/pound, while barrels closed at $1.95/pound; just about where the two prices should be in relation to each other.

Milk production is lagging in the Midwest. Thus, cheese and butter-powder plants are competing for fresh milk, explaining the strong Class III and Class IV prices. How long will this last? I don’t know — remember what I wrote in the first paragraph about predicting milk prices.

For now the futures markets are indicative of strong milk prices in 2014, especially in the first half of the year. Currently, Class III futures are averaging over $18/cwt for the whole of 2014. This would translate to an average blend price somewhere around $20/cwt in Ohio.

Coupled with corn prices in the $4-$4.50/bu. range, these futures prices are auguring for a good year for our dairy producers.

So I don’t know what 2014 will actually be bringing us. I would bet for plenty of unpredictable events, enough to humble the most pompous forecasters.