Monday, April 20, 2009

Long Term Trends

The long term trends for Class III butterfat and protein prices indicate an upward trend for protein and a steady level for butterfat. There is good reason for these trends and good reasons for the short term drops.

Lets examine the long term consumption trends for fluid milk, butter and cheese in the U.S. over the last century - yes 100 years of data.

Fluid milk has had a very long term downward trend in consumption. We can be critical of the trend, we can rationalize the trend, but it is real and there is a very high probability that it will continue.

Butter consumption dropped by 75% until the mid 70's. Since then it has been steady. So has the price of butterfat.

Cheese consumption is steadily going the other way.

Cheese consumption has been increasing for years and there is no reason to think it won't continue (April 9 blog post). Cheese cannot be made without protein. Does it bear a resemblance to the chart above on protein price? It should and it does.

These trends significantly impact the dairy industry. When fluid milk was "King", our dairy industry econimics were dominated by domestic economic factors. Fluid milk has a limited shelf life and was expensive to transport due to the high volume of water.

Now that cheese is becoming "King", the dairy financial picture shifts drastically. Because cheese has a much longer shelf life and has up to 10 times the value of milk on a per lb. basis, the global dairy economy comes into play. Dairy economics are now impacted by global supply and demand and fluctuations in currency rates.

Poultry, beef, soybeans and many other food and agricultural markets have had to live with the influence of global supply and demand changes and currency fluctuations for years. Now dairy can join the list of industries subject to the ups and downs of global influences.

How will the dairy industry cope? Will the industry have to emphasize the use of tools like future markets and exchange rate hedging? More to come on this in future posts.

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