Dairy Policy and Market Watch

Dr. Cameron Thraen, Milk Marketing Specialist, The Ohio State University, Additional milk marketing information by Dr. Thraen

I have just returned from sunny Orlando, Florida, where I attended the 2007 Dairy Forum. Dairy Forum 2007, sponsored by the International Dairy Foods Association (IDFA), is an annual event where representatives from across the dairy industry, including milk producers, dairy cooperative leadership, members of the Federal Milk Marketing Order Branch, and university dairy economists, get together to look into the industry and policy crystal ball. Here is a condensed list of what these folks see as front-burner items and for which every dairy farm family should be aware of and following in the coming year.

Federal Milk Marketing Orders: The current pooling and pricing arrangements for Class I and Class II revenues is just not working, and this is creating distortions and unhappiness in the dairy industry. This, along with the entire price-by-rule approach, appears to be under intense pressure. What is being discussed? One item is a renewed look at the concept of national pooling for all Class I and Class II revenues. Also, some are pressing for an end to Federal orders in their entirety. Nothing is certain other than a general state of frustration with the current situation.

New Class III and Class IV pricing rules: No one, and this includes the USDA/Agricultural Marketing Service (AMS), Federal Order branch, is really okay with the current Class III and Class IV pricing rules. Look for continued pressure on the USDA/AMS to scrap the current pricing formulas for Class III and Class IV. Talk of returning only to minimum pricing for Class I is in the air. A ruling favoring the plaintiffs in the court challenge filed here in Toledo, Ohio (Bridgewater Dairy, LLC, et al. -vs- USDA) will push the USDA/AMS to consider a new national hearing on all aspects of these pricing rules.

Federal Price Support Program: All agreed on the fact that the current floor price program offers no real support to milk producers. Many in the industry believe that the current Milk Income Loss Contract (MILC) program should replace the federal price support program. Some, such as IDFA, are calling for elimination of the MILC program in favor of the federal support price program but not both. A restart of World Trade Organization negotiations will likely push us toward less price support, not more. Look for a real discussion of replacing price floors with some type of MILC program, one which will pass the trade test in the up-coming farm bill.

Trade Liberalization: The general consensus is that we are becoming a major player in the export side of the world trade market for dairy proteins. This is a good thing, and we do not want to put in place obstacles to the future expansion of this market opportunity. It has been estimated that 80% of the improvement in the Class III price on the Chicago Mercantile Exchange (CME) futures market can be traced to the rising price of whey proteins. The challenge in the trade arena is how to provide support to producers in a manner that is decoupled from current production decisions.

Market Watch

I have recently updated my 24 week forecast for the dairy commodity prices and the Class III price. This can be found at the Ohio Dairy Web 2007 website. The link is: http://aede.osu.edu/programs/ohiodairy/quickchart/nass52.htm

What I see at this time is a very bullish Class III price forecast for the next 24 weeks. This forecast is driven by price improvement in the cheese protein market and the strength in the nonfat skim and whey markets. Cheese based protein will average $0.46/lb higher than last year, nonfat dry milk price will average $0.20/lb higher than the same period in 2006, and the whey price also will average $0.20/lb higher. This translates into a Class III price that will average $2.58/cwt higher than the same period last year. The Class III price will average $13.99/cwt over the coming 6 months. Butter and cheese prices will be firm but not outstanding. Any disruption in the international protein markets or rapidly weakening domestic demand will knock the wind out of these prices and send them into a free-fall. Currently, the CME futures prices are posting substantial premiums over historical Class III averages. For more information on the dairy industry, prices, and policy, link to my Ohio Dairy Web 2007 at: http://aede.osu.edu/programs/ohiodairy/