Wednesday, May 26, 2010

Dairy Industry Struggles to Find Balance

After last year’s turmoil, the dairy industry’s overconfidence continues to frustrate efforts to bring the industry into balance.

Consumer demand for milk is falling slightly, with high retail prices and nutritional concerns deterring consumers. Yet, even after a year that saw shockingly low prices paid to milk producers, U.S. dairy farmers produced the most milk ever last month. The increase in production, which is also occurring in Australia and Europe, is based on predictions of increases in milk prices, but with the excess supply, prices are sure to fall again.

Another indication that production is too high: U.S. cheese inventories are the highest in 26 years. U.S. consumers are eating less cheese, but unlike with milk, this has less to do with prices than with the association between cheese and restaurant food. It seems people mostly eat cheese in restaurants, and with the restaurant business off worldwide, the demand for cheese is lower. At the same time, excess milk supply tends to get turned into cheese, so cheese inventories will probably increase further, setting new records as the year goes along. Wholesale cheese prices have risen 10 percent in the last month, but with low demand and near-record inventories, prices seem certain to fall back at least to the previous levels.

With milk and cheese demand stagnating, cutbacks in production have to happen somehow. The problem is that governments are projecting higher demand and higher prices, leading dairy farmers to produce more milk than the market can support. Eventually, after being stung three years in a row, government authorities will have to lower their projections, or farmers will have to stop relying on them.