What has become the standard ebb and flow of U.S. dairy prices may very well be coming to an end according to a report released Wednesday by Rabobank's Food & Agribusiness Research and Advisory group.
The report, titled "Dysrhythmia," predicts that the U.S. dairy market can no longer depend on the predictable market cycles it had become accustomed to in the 1990s and through the mid-2000s.
Now finding itself part of the global market, the U.S. dairy industry has ended a decades-long period of isolation. The explosion of prices on the world market encouraged the U.S. to begin supplying large volumes of exports to the international market, with no need for government subsidies to do so – quickly bringing the U.S. and international dairy prices into alignment.
With an exposure to the world market comes extreme diversity and volatility – including factors such as income growth in the developing world, dietary shifts, product contamination, shifting regulation and currency strengths in import regions.
Volatile Feed Costs
The report also notes that producers continue to face volatile feed prices that make less regular dairy price cycles even more difficult. In the past, feed costs for dairy producers were reasonably stable, more or less tracking the costs of producing corn, soybeans and hay.
As a result, dairy producer margins tended to be revenue-drive, rising and falling with the milk price they received. Since 2007 however, feed prices have shifted to a higher trading range and now short-term shifts in the cost of feed do not necessarily track those of milk prices – with revenue and costs moving in the opposite direction at times.
With a predictable price cycle for dairy no longer in place, the report concludes with recommendations on how U.S. dairy operations can embrace this new challenge including locking in the prices of milk and feed through the use of listed future contracts and/or forward contracts.