briskcontent.ie5

AgriculturalOutlookForumPresented:Friday,February25,2000THEOUTLOOKFORDAIRYJamesJ.
MillerEconomicResearchService,USDAEarly2000newsofthedairyindustryhasbeendominatedbydiscussionoflowfarmmilkprices.
However,thereallyremarkableaspectisnotthelowprices--buthowdifficultitwastobringthemtothislevel.
During1998-99,milkproductionrosemorethan4percent.
Yet,milkpriceswererecordsin1998andwellabovethedecade'saveragelastyear.
Onlytheoutputjumpsoflate1999werelargeenoughtodroppricessharply.
Theracebetweenexpandingmilkproductionandexceptionaldemandgrowthisnotyetover,althoughmilkproductionistheheavyfavoritefor2000.
DairyDemandSurgesDuringeachofthelasttwoyears,realgrowthintheeconomyexceeded4percentasthecurrentexpansionapproachedrecordlength.
Disposablepersonalincomealsorose4percentininflation-adjustedterms.
Withmoneyintheirpockets,theirassetsbuoyedbyastrongstockmarket,andconfidencehigh,consumerswereinthemoodtospend.
Realpersonalconsumptionexpendituresroseabout5percentin1998andin1999.
Expendituresforfoodsharedtheincrease,risingalmost3percentin1998andacceleratingtoalmost4percentin1999.
Consumerwillingnesstotreatthemselvesboosteddemandforcheese,butter,andmilkfatforprocessedfoods.
Despitehighpricesin1998and1999,commercialuseofAmericancheesejumpedalmost8percentlastyear,followinga3-percentrisein1998.
Salesofothervarietiesrose5percent,after2-percentgrowthin1998.
Meanwhile,commercialuseofbutterjumpedalmost5percenttothehighestlevelsince1960.
Sharplyincreasedspendingforaway-from-homeeatingundoubtedlywasanimportantfactor,aswaswillingnesstopayfortheconvenienceofotherformsofcommercialfoodpreparation.
Inaddition,consumersprobablysimplydidnotletpriceshavemucheffectonfoodchoices,particularlywhenentertaining.
Demandforthosedairyproductsmoredependentonretailsalesgenerallywasnotasstrongasforbutterandcheese.
Fluidmilksalesgrewonlyfractionally,whileuseofcottagecheeseandmostfrozenproductsslipped.
Evenfortheseproducts,consumerindulgencewassomewhatinevidence.
Wholemilkandreducedfatfluidproductsrose,whileskimmilksalesdeclined.
Similarly,regularicecreamdecreasedlessthandidlowerfatfrozenproducts.
Notallwasrosyfordairydemand,however.
Useofseparatedskimsolidsinprocessedfoodsfellsignificantly,eventhoughtheseproductswereinamplesupplyatstableandrelativelylowprices.
Commercialdisappearanceofnonfatdrymilkfellalmost6percentin1999,followinga3percentdeclinein1998.
Inpart,thedecreasereflectedtheamplesuppliesofrawmilkandthereducedneedtousepowdertoproduceotherdairyproducts.
However,finaluseofnonfatdrymilkhasobviouslyslipped,ashastheapparentuseofwetformsofskimsolidsasingredients.
Thisweaknessheldgrowthinthetotal1999salesofskimsolidstoonlyhalfthe3-percentincreaseinmilkfatuse.
Relativelystronggrowthindairydemandislikelytocontinuein2000.
But,itmaynotmatchtheboomof1998-99.
Economicactivityandconsumerincomesareexpectedtoriseatabriskrate,althoughpossiblynotquitematchinglastyear.
Someofthe1999exuberanceinfoodspendingmaybemissing,particularlyfordairyproducts.
Apartofthestrengthin1998-99demandprobablywasjustmakingupforthesomewhatsluggish1996-97reactiontoeconomicexpansion.
Weaknessinuseofskimsolidsinprocessedfoodsisamajoruncertaintyinthe2000demandoutlook,inpartbecauseinformationabouttheseusesisrelativelysparse.
Ifsuchuserecovers,orevenjuststabilizes,dairydemandwouldloseitsonlysubstantialweaknessandthecurrentperiodoflowpriceswillbefairlyshort-lived.
However,furthererosionofthismarketcouldleaveasurplusthatwouldsapcheesepricesandmightrequirealongtimetoworkoff,evenifeconomicgrowthcontinues.
MilkProductionAlsoSurgesMilkproductionisinthemiddleofasubstantialexpansionprecipitatedbyrelativelyhighmilkpricesin3ofthelast4years,lowconcentratefeedprices,andamplesuppliesofalfalfahay.
Milkcownumbersareaboveayearearlierforthefirsttimesince1986andmilkpercowisgrowingbriskly.
Milkproductionin2000willaddanotherlargeincreasetolastyear'sriseofmorethan3percent.
Milkpercowrosemorethan3percentin1999.
Althoughtheyear-to-yeargrowthwasexaggeratedbytherelativelyweak1998milkpercow,lastyear'swasthefirstabove-trendincreasesince1994.
Amilk-feedpriceratioaveragingabove2.
0forthefirsttimeeverdeservesmuchofthecredit,reflectedahugeincentivetoprovidecowswithallthefeedtheycanuse.
Inaddition,therewerenoseriousweatherproblemsdirectlyloweringmilkpercowinasignificantway.
Althoughsuppliesofprimealfalfahaystayedtight,therewasmoreavailablethanduringthepreceding2yearsbecauseofreducedexportdemand,andsuppliesofmediocrealfalfawereverylarge.
Largesuppliesofgrainsandoilseedswillkeepconcentratefeedpricesrelativelylowin2000,possiblythelowestin13years.
Themilk-feedpriceratioisexpectedtostaymodestlyfavorabletoincreasedconcentratefeedingandgrowthinmilkpercow.
Stocksofalfalfahayprobablyarelarge,basedonlastyear'sheavyalfalfaproductionandthelargetotalhaystocks.
Milkpercowisprojectedtoriseabout2percentthisyear.
Lowerreturnswillbegintoweakenmilkcownumbers--buthowquicklyanddramaticallyisveryuncertain.
Largenumbersofproducershavebeenhangingonbuthavenotgeneratedmuchfamilyincome,evenduringthelast2years.
Returnsoverconcentratecostsareexpectedtofallabout10to20percentin2000tolevelssimilarto1997.
Atthesereturns,exitofweakerproducerslikelywillaccelerate,possiblysoon.
Anextendedperiodoflowreturnsmaybeneededtoslowfarmerexpansion.
Theunexpected1998-99returnsgavethelarge,"new-style"dairyfarmsasizablewarchestforexpansion.
Tightwesternalfalfasuppliesandascarcityofreplacementheifers,factorsthatlimitedexpansionduring1998and1999,eitherhaveorareexpectedtoease.
Relativelylargenumbersofneworgreatlyenlargedoperationshaveorwillbecomingintoproductioninanumberofregions.
Thesefarmswillnotbedeterredbytheexpectedreturnsandwillbemovingtowardfullproductionthisyearandnext.
Averagemilkcowsnumbersmaydeclinethisyear,butanydecreaseprobablywillbeverysmall.
Increasedfarmexitisexpectedtobeginovercomingtheeffectsofexpandingproducersbyaboutmidyearandrestoreyear-to-yeardeclinesinmilkcownumbers.
However,thestrongexpansionmomentummightkeepcownumbershigherthroughout2000.
InternationalMarketsQuietRecentinternationaldairymarketshavehadarathertenuousstability.
Priceshavemovedlittleeventhoughdrymilkmarketsappearedtobetightening,buttermarketssoftening,andexchangerateschangingsignificantly.
MilkoutputisagaingrowingsubstantiallyinOceaniabutnewsalesarenotbeingsoughtveryaggressively.
TheEuropeanUnion(EU)isinthemiddleofthenormalend-of-quota-yearsupplyuncertainty,butexportsuppliesseemfairlylimitedbecauseoflargesalescommittedearlierandfairlygooddomesticuse.
Internationalbutterdemandstaysmodest.
Russiahasbeenimporting,butnotintheamountsofafewyearsago.
DrymilkdemandhasbeenmoreactiveastheAsianeconomieshaverecoveredandasseveralLatinAmericancountrieshavebeenactive.
InternationalmarketpricesarenotexpectedtochangedramaticallythisyearunlessweathercutsOceanicproductionearlyinthe2000/01season.
EUexportsuppliesareprojectedtobefairlysteady,whileU.
S.
DairyExportIncentiveProgram(DEIP)exportswillbesmaller.
Meanwhile,internationaldemandisnotexpectedtoimprovesubstantially.
Drymilkpricesmighttendalittlestronger,whilebutterpricesstagnate.
Evenwithoutmuchriseininternationalprices,theweakerdomesticpricesimplythatU.
S.
importsbeyondTRQlevelsprobablywillbesmallerin2000.
ContractsundertheDEIPwillbefairlymodestuntilthenewallocationsbecomeavailableatmidyear.
Lessthan10,000tonsofnonfatdrymilkremainsunfilledfromtheregularallocation,andthereallocatedamountforApril-Juneisonly6,300tons.
Mostofthemilkfatallocationremains,butothershavebeenfairlywellusedup.
ImportingcountrieshavebeenfairlyaggressiveaboutlockingupDEIPcontractsfordrymilkssincelastsummer,inpartreflectingthetighteninginternationalmarketsandinpartthesmallerDEIPlimitsunderWTO.
Ifinternationalmarketconditionscontinueasexpected,drymilkcontractsmayagaingofairlyquicklyonceavailable.
Surgingmilkproductionandweaknessinsomeusesgeneratedasizablesurplusofskimsolidsthroughout1999andearly2000.
WithopportunitiesfornewDEIPcontractsquitelimited,salesofnonfatdrymilktothegovernmentunderthedairypricesupportprogramhavebeenrelativelyheavysincemid-December,about10millionpoundsperweek.
Ifsalesofskimsolidsforingredientusestabilizesasexpected,thisyear'snetremovalsmaybeslightlylessthan,orcloseto,1999's6.
5billionpounds,milkequivalent,skimsolidsbasis.
Lastyear'sskimsolidssurpluswasthelargestsincetheeighties.
Tightmilkfatmarketsin1999meantthatnetremovalsweretinyonamilkfatbasis,withexportersunabletogetsuppliesformuchoftheallowableDEIPexportsofbutter.
In2000,DEIPbutterexportsmightbeslightlyhigher,andpricesupportpurchasesofcheesecannotberuledout.
However,netremovalsofmilkfatareexpectedtostayquitesmallasmilkfatmarketsarelikelytostayfairlytight.
PricesDownSharplyCurrentwholesalepricesofbutterandcheesearewellbelowthelevelsofmuchof1999,andheavymilkproductionthreatenstokeepthemthereforseveralmonths.
However,pricesaremoreunsettledthanwouldnormallybeexpectedinlightofthegrowthinmilkoutputandtheseasonallyquietmarketstypicalofwinter.
Verylargequantitiesofmostdairyproductscontinuetobesold.
Aslongasdemandremainssostrong,evenaverymodestslackeningoftheproductionexpansioncouldtriggersubstantialpriceincreases.
Thepossibilityofamarketsituationsimilartolastyear'sisonthemindsoftraders,evenifpotentialpriceswingsprobablyaresmaller.
Priceincreasesmaybeginwellbeforetheseasonalpeakinoutput,ortheymaynotcomeuntilalmostautumndependingonwhenproductionrisesstarttoease.
Inanycase,seasonalpricerisesareprojectedtobesmallerthaninrecentyears.
Farmmilkpricesin1999fellabout$1percwtto$14.
38.
The2000declineisprojectedtobecloserto$2percwt,leavingpricessimilartothoseoftheearlynineties.
Evenverystrongdemandcannoteasilyabsorba5-percentincreaseinoutputover2years.
Ourviewofthelonger-termforcespushingthedairyindustryhavenotchangedmuchinrecentyears:slowgrowthinproductionanddemand,atendencytoverygradualdeclinesinrealprices,andadomesticmarketthatisrelativelyisolatedfrominternationalmarkets.
However,thebaselineprojectionsmusttakeintoaccounttheadjustmentpatterngeneratedbythegenerallystrongpricesof1996-99.
Prolongedpricestrengthleadstosustainedgrowthinmilkproduction,thatleadstoaperiodoflowprices,thatleadstocorrectionsinproductionandprices.
Sometimeduringthenextfewyears,lowerreturnswillslowexpansionbythestrongerproducersenoughthatitcannolongercoverboththeexitofweakerproducersanddemandgrowth.
Thetimingofthiseventisverydifficulttopredict,inpartbecausethedataavailableisquiteinadequate.
However,weexpectthatatleast2yearsofrelativelylowpriceswillbeneededtoslowgrowthinmilkproduction.
Demandobviouslyalsoplaysarole,underthecurrentcircumstancespossiblymoresothanever.
Iftherecentphenomenaldemandweretocontinue,theperiodoflowpricescouldbesignificantlyshortened.
Ontheotherhand,arecession(orevenaperiodwithoutsignificantgrowth)couldsignificantlyextendthelow-priceperiod.
Sincetheeconomicexpansionhasalreadyreachedrecordlength,aslowdownofsomesortisanaturalconcern.
Thereisalsoaquestionofdelayeddemandresponsetothehighpricesofrecentyears.
Weareusedtothinkingoflong-runpriceresponseasbeingsimilartotheshort-runresponse.
But,changesinthenatureofdairyproductdemandmayhaveaccentuatedlagsinthedemandresponsetohighdairyprices.
Morethanone-halfofthesalesofmilkfataretoaway-from-homeeatingplacesortofoodprocessors--notdirectlytoconsumersthroughretailstores.
Forskimsolids,theshareisonlyslightlylessthanone-half.
Commercialbuyersdonotnecessarilyrespondlesstochangesinwholesaledairyproductprices,buttheycertainlyresistquickchanges.
Thereisarealpossibilitythatproductreformulationsandmenuchangesinresponsetothetightmarketsofrecentyearsmaystillbeinthefuture.
Foodprocessorschasingconsumerfadsmayberesponsibleforonekeyaspectofthecurrentmarketsituation.
Useofskimsolids,bothdryandwet,inprocessedfoodsrosesharplyduringthefirsthalfofthenineties,beforedroppingagaininrecentyears.
Someofthisincreasewasundoubtedlycausedbytheintroductionofpremiumversionsofstapleproducts.
However,thetimingoftheincreasesandthesubsequentdeclinessuggeststhatamajorcontributingfactorwasthefadforlowfatornonfatfoods.
Thisisfurthersupportedbytheprominenceofbakedgoodsandtheiringredientproductsamongthesurgeofnewproductintroductionsduringthisperiod.
Ifthedemiseoflowfatfoodshasbeenamajorsourceofthe1998-99declinesinskimsolidsdemand,thenthisdemandweaknessmayhaveaboutrunitscourse,sincelastyear'suseprobablywasbacktothelevelsoftheearlynineties.