Milk prices sliding 14 pct. as cows boost output
(Bloomberg) -- The bull market for milk that sent prices up 49 percent this year, more than any agricultural commodity, may be ending as farmers respond with record production and the costliest cheese in a quarter century curbs demand.
Output in the U.S., the world's second-largest producer, may rise 1.7 percent to 196 billion pounds in 2011, enough to fill about 34,500 Olympic-sized pools, the Department of Agriculture estimates.
Dairies, though, are missing out on profits from milk's biggest rally since at least 1996.The surge in the cost of grains that drove world food prices to a record, contributing to protests in northern Africa and the Middle East, also boosted the cost of feeding cows. While income for grain and cotton growers will rise more than 20 percent this year, earnings at dairies may drop 13 percent, the government estimates.
"Grain farmers are having some of the best years they've had in a long time profit-wise, but you couldn't say that for dairy," said Bob Cropp, an economist at the University of Wisconsin in Madison who has been studying the industry since 1966. "Dairy facilities are running at the maximum. With a little softening in demand, prices are going to come down."
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COMMODITIES RALLY
Milk's 2011 rally has exceeded those of all agricultural futures traded in New York and Chicago including cotton, which surged 42 percent and reached a record last week. The Standard & Poor's GSCI Index of 24 commodities advanced 11 percent, and the S&P 500 Index of stocks rose 3.7 percent. As of March 10, Treasuries gained 0.1 percent this year, a Bank of America Merrill Lynch index shows.
Traders are already anticipating a drop, with the December contract at a 15 percent discount to the one that expires this month. Shawn Hackett, the president of Hackett Financial Advisers, who correctly projected in October that milk would surge, now says prices may fall as low as $15 amid higher output in Australia and New Zealand, the largest exporter.
Riots have erupted from Bahrain to Morocco, in part fueled by food costs the United Nations says reached a record last month. Protests already toppled leaders in Egypt and Tunisia. The projected drop in milk prices will do little to relieve the surge in food inflation that the World Bank says helped drive 44 million more people into extreme poverty since June.
FOOD MARKET
Milk's rally may continue for several more months because exports will support prices, said Jerry Dryer, the Delray Beach, Florida-based publisher of the Dairy & Food Market Analyst, who has been following the industry for three decades.
Shipments surged 63 percent to $3.7 billion last year, nearing the 2008 record of $3.8 billion, U.S. Dairy Export Council data show. Cheese exports rose to an all-time high, and milk-powder sales climbed 61 percent, the Arlington, Virginia- based trade group said.
U.S. exports rose as New Zealand saw soaring demand from China, said James Dunn, an economist at Pennsylvania State University in University Park. China bought about 353 million kilograms (778 million pounds) last year, compared with 69 million kilograms in 2008, according to New Zealand government data.
LAST RALLY
Milk's last advance of this magnitude ran for 15 months through June 2007, when it more than doubled to a record $22.45. Prices would have to advance 14 percent more to match that peak.
"This rally will last at least a full year before rising production catches up with demand," said Dryer of Dairy & Food Market Analyst. Others question that.
Consumption may not support the gains much longer, said Mary Ledman, a former economist with Kraft Foods Inc. U.S. milk production this year may begin rising in April and May, just as retailers start increasing prices to shoppers, she said.
Safeway Inc., the fourth-largest U.S. supermarket chain by sales, said Feb. 24 that it began to pass higher costs to consumers during the fourth quarter, including for milk.
"Retailers' margins in the dairy case, and particularly on fluid milk, have been squeezed since 2010," said Ledman, who owns the Libertyville, Illinois-based consultant Keough Ledman Associates. "I don't think they have any choice but to raise retail-milk prices in 2011."
