Foreign milk demand hands record profits to US dairies
CHICAGO: In a year when most American farmers can expect lower earnings than in 2013, milk producers are having a windfall.
Prices have never been higher, feed costs are down, and output is headed for an all-time high as exports surge to buyers from Mexico to China. While the average farm will see a 21 per cent drop in net- cash income, led by declines for corn, wheat and soybeans, dairy farmers will earn 28 per cent more at US$ 334,100 ( RM1.1 million), the US Department of Agriculture predicts.
“Dairy farmers are making the best money they’ve made in many, many years,” said Peter Gutierrez, vice president of global ingredient sales for Agri-Mark, a 1,200-member dairy cooperative in Methuen, Massachusetts, that makes Cabot Creamery cheese and sells about 120 million pounds annually.
Milk futures in Chicago are up 23 per cent this year and cheddar cheese gained 19 per cent, with both reaching records last month. The higher prices are eroding profit margins for domestic purchases including dairy processor Dean Foods sandwich chain owner Potbelly and Annie’s, a maker of organic macaroni and cheese.
While the USDA expects domestic milk output to rise for a fifth straight year, up 2.2 per cent to 205.7 billion pounds ( 93.1 million metric tons), exports now account for 15.5 per cent of sales, compared with five per cent a decade ago, according to the US. Dairy Export Council, an industry group based in Arlington, Virginia.
Global economic growth is expanding the middle class from Asia to South America, boosting demand for dairy products including cheese and processed foods containing milk. US dairy exports reached 162,999 tons in January, up 19 per cent from a year earlier, while the value rose 35 per cent to US$ 583.7 million, council data show. Cheese shipments jumped 46 per cent to 32,118 tons, with a 38 per cent increase to Mexico, the biggest buyer of US dairy products, and a doubling to China.
“The export market is very firmly in everybody’s mind, from farmers to processors,” said Peter Vitaliano, vice president of economic policy and market research at the National Milk Producers Federation. “No one really has dairy surpluses anymore.”
Demand is expanding in China, the world’s most-populous nation, with 1.355 billion people, which overtook Japan as the second-largest economy in 2010. China’s dairy imports probably rose 30 per cent last year, Yvon Guerin, the chief executive officer of Parmalat, an Italian dairy processor, said during a March 10 earnings call.
Chinese dairies have been unable to keep pace with rising demand, and the pace of import buying has “caught a lot of people off guard,” said Bill Schieck, an economist with the Dairy Institute of California, the largest US milk-producing state. “The number of cows, as best as we can tell, is down, which has left a huge hole that they’re trying to fill.”
Class III milk futures, which track a variety used to make cheese, are up 23 per cent this year on the Chicago Mercantile Exchange, after touching a record US$ 24.15 per 100 pounds on Mar 24. That same day, a 40pound block of cheddar reached US$ 2.4325 a pound, the most since data begins in 1997. The Standard & Poor’s GSCI Spot Index of 24 commodities rallied 2.6 per cent in the first quarter, while the MSCI All- Country World Index of equities advanced 0.6 per cent. The Bloomberg Treasury Bond Index gained 1.7 per cent.
Dairy costs tracked by the United Nations are the highest
The export market is very firmly in everybody’s mind, from farmers to processors. No one really has dairy surpluses anymore. Peter Vitaliano, vice president of economic policy and market research at the National Milk Producers Federation
since the data began in 1994, after climbing 9.8 per cent in the three months through February, outpacing the 1.2 per cent gain for all foods.
“These unusually high rawmilk prices are an undeniable headwind for our business,” Gregg Tanner, chief executive officer of Dallas-based Dean Foods, said in a Feb 11 earnings call.
“While the company’s costs may rise by as much as US$ 600 million this year, any increase to consumers has to be weighed against the risk of “letting prices get so far out of whack that people just stop buying milk,” he said.
Rising dairy and meat costs are the biggest sources of “potential inflation” at Chicago-based Potbelly, Chief Financial Officer Charles Talbot said in a Feb 18 earnings call. The company may raise menu prices, he said.
Higher cheese costs are contributing to a “tough commodity inflation environment” at Berkeley, California-based Annie’s, Zahir Ibrahim, the chief financial officer, said March 13 at an analyst conference.
Dairy costs are “a concern” at Seattle-based Starbucks, the largest coffee-house chain, said Troy Alstead, the chief operating officer. “You’re not able to protect it more than a handful of months,” he said in a Mar 19 interview. “It’s a very thin market in terms of futures.”
Rising output may overwhelm demand. New Zealand, the largest dairy exporter, expects a 4.5 per cent rebound in production in the year ended May 31 after the most widespread drought in three decades. European Union production will grow 2.6 per cent in the first six months of the year, according to Rabobank International.
Fonterra Cooperative Group, the world’s largest shipper of diary products, said it will boost capacity to process more milk into powder, which is the primary form of dairy exports. The Auckland, New Zealandbased company “processed as much of this milk into the higher-returning milk- powder streams as we could,” Chief Executive Officer Theo Spierings said in a statement.
Production unexpectedly rose in California, where drought conditions have led to water shortages and higher feed costs as pastures dried up.
The state’s 5.3 per cent increase in February to 3.4 billion pounds was second only to the six per cent gain in Colorado.
The dry conditions have been ideal for cows, helping the seasonal “spring flush” begin sooner than usual, according to Tom Barcellos, a dairy farmer in Porterville, California, with 1,300 cows.
His herd is producing a record 13,000 gallons a day, and one of the two plants he sends his milk to has sent notices that it is nearing capacity.
While exports are rising, domestic demand is shrinking. Per- capita consumption of fluid milk in the US has been dropping for at least the past four decades, down 25 per cent since 1975, according to the USDA.
Prices have already begun to retreat. The weighted average price of nine products traded at the GlobalDairyTrade, which serves as a world-wide benchmark, dropped 5.2 per cent to US$ 4,563 a ton.
Milk futures for December delivery closed yesterday at US$ 18.56, or 22 per cent below the April contract.
“We’ve seen our peak for the year here in the first quarter” for Chicago milk futures, said Katelyn McCullock, a dairy and forage economist at the Livestock Marketing Information Centre in Denver.
“Milk prices are going to decrease throughout the year.”
Output may begin to slide in California, where 95 per cent of the state was rated in severe to exceptional drought as of March 25, according to the US Drought Monitor. — WP-Bloomberg