Market Outlook

Milk production is slowly gathering steam after eight months of high milk prices, and without
intervention, growth could accelerate through 2008. For now production is growing
despite only modest growth in the herd. Even as feed prices have risen by as much as $2 to
$3 dollars per hundredweight of milk, and despite reduced use of rBST, farmers are boosting
per-cow production to take advantage of record milk prices.
At the same time, domestic demand is also responding to high prices. Flat to slightly lower
sales of fluid milk and cheese are better than should be expected with retail milk prices up
by a quarter and wholesale cheese at record highs.
Nevertheless, sales are down, and production is rising. In the past, this would mean a
crash is coming. But not today.
Today a larger world market is relying on U.S. dairy products and, for now, this is turning
the logic of domestic supply and demand upside-down: the U.S. supply is growing, U.S.
demand is stagnant, but prices stay up.
For example, domestic demand for butterfat was flat in the third quarter. Commercial disappearance
of butterfat rose 1.3%, or 22 million pounds, but three quarters of this increase,
16½ million pounds of butterfat, was contained in increased butter exports (including butteroil,
anhydrous milkfat, and such). Butter imports fell by nearly 10 million pounds; so net
exports increased by over 30 million pounds, equal to more than 24 million pounds of butterfat.
Take away this improvement in butter trade, and U.S. demand is down 0.1% for the
quarter.
More than 10% of commercial disappearance of skim solids consists of exports, especially
dry ingredients. Without these sales, this supply would oeverwhelm the domestic market
for a time.
Customers world-wide are pushing back on this year’s record product prices, so prices
must be lower next year. Still, we see a strong, export-assisted price outlook for 2008, even
as U.S. production expands to meet world demand.