Spend Matters welcomes a guest post from Yasan Namazi of Mintec.
Fresh milk in the US reached an unprecedented price level in April. The price has been rising continuously during the last few months, at a time when milk prices usually go through a seasonal dip.
Seasonality is an important factor in the price of milk. In the Northern hemisphere, milk prices tend to reach their peak in November when production is lowest and then fall as production increases. By May the price usually reaches its lowest point in the year. This year however, milk prices in April were 9 percent higher than in January and 31 percent up on the corresponding period last year. This is despite milk production being 1 percent higher year-on-year. Seasonality may not be the only driver of milk prices if there are other applicable factors.
The main reason behind this year’s unusual price rise is strong global demand for dairy products, which has led to a sharp increase in US dairy exports, outstripping the increase in production. All US dairy products exports increased in January to March 2014. Exports of whole milk powder (WMP) and skimmed milk powder (SMP) reached 14,000 tons and 127,000 tons respectively during this period. WMP exports were up 236 percent and SMP exports were up 19 percent year-on-year. In addition, US cheese exports totalled nearly 100,000 tons in Q1 2014, 42 percent higher than during the same period last year. And butterfat exports were up 115 percent to over 31,000 tons. In value, dairy products exports reached over $1.8 billion in Q1 2014, an increase of 39 percent over the same period last year.
Mexico, the Middle East, North Africa, South Korea, China, and Japan (in no particular order) were the top export destinations. This significant increase in global demand is due to several reasons, such as growing population, changing tastes - especially in the Far East - and adverse weather in some other parts of the world affecting milk production. The rise in the price of milk has been welcomed by some milk producers that have had profits squeezed during the last few years. Usually an increase in the price of milk is accompanied by an increase in feed cost, which does not lead to an increase in profits for dairy farmers. However, this time it is not the case for many US milk producers. According to Henry Bierlink, executive at Whatcom Farm Friends in Washington State, “It's a welcome relief after a decade of struggling to break even.”
Demand is unlikely to ease this year. However, we should keep our eyes on milk production in New Zealand and Australia. As major dairy exporters, especially to the Far East, milk supply in these countries exerts a strong influence on the global price of milk. It will be very interesting to see where the milk price will go when Oceania reaches its peak production levels in October and November.