Dairy commodity prices have been falling for the last two months and are starting to bottom out. All the dairies have built in the drop in milk price for May which will be between 3 and 4 cents a litre in Ireland; this is on top of the 2 cents drop in April.

As you can see from the chart below this looks like signalling a possible change in direction from the upward trend that has been in force since 2009.

Milk production is up across Europe, Russian regions,  America and the southern hemisphere. In the USA, the World Agricultural Supply and Demand Estimate (WASDE), raised its estimate of milk production from 197.7 billion pounds to 201.1 billion pounds. If this proves to be accurate it will be the first time ever that US milk production has hit the 200 billion mark.

This abundance of supply is mirrored across the board. Sticking with the US, the world’s biggest and most influential dairy products market, cheese production is up 6%, dry whey up 9% and butter production up 14%. The big question mark is can the demand keep pace. With most of the developed world, either in or close to recession, and the developing economies coming off the boil, the pressure on demand looks set to mount.

This environment where supply is expanding and demand is at best stabilising and at worst contracting must mean that prices across the board in dairy commodities look set to decrease. For example in our market:-

• Butter prices have dropped from high of £4000 to a low of £2100 pmt today
• Mild cheddar has come back from £2950 to £2500
• Mozzarella dropped £3000 to £2400
• Mature cheddar has not moved at present and is still trading around the £3000 to £3200 pmt mark.
• SMP and WCP powders have dropped price in line with cheese products. They are the only dairy products that haven’t moved downwards to the same level as speciality cheeses or regional cheeses.

Going forward for the rest of the year, I believe prices have probably hit the bottom and will stay broadly the same through to the end of Q3, easing up slightly in Q4 and the 1st quarter of 2013.

3 YEAR FORECAST

Looking back on the last three years you would have had to be very fortunate to have made accurate predictions for how the Dairy Products Market, or indeed any market would have moved. The next three years look like being similarly unsettled. We know, for example, that milk quotas are going in 2015 so milk production will continue to increase year on year.  But with supply increasing, the concern that remains is what will happen to demand.

Dairy consumption is growing year on year and with the world population expected to hit 10 billion by the year 2050 that should apply some upward pressure. There is certainly evidence that population growth and food production keep pace with each other (see figure below);

But just as removing the Milk Quotas will make supply levels hard to predict, the dramatic growth in new consumption of dairy produce in developing countries will have a similar unsettling effect on demand.  In China (see figure below), for example, the volume of Dairy Imports has grown by over 500% since 2001, with over half of that growth taking place since 2009.

All in all, I believe food prices will trend at  1% ahead of inflation rates and the experience of  cheap food will become a thing of the past.

Dairy product prices will remain volatile going up and down over the next three years.  But after every fall we expect that prices will correct at a slightly higher level than before. The first chart shows that pattern quite well.

We at Ingredient Solutions will, as we have always done in the past, do our best to iron out these peaks and troughs to provide a degree of price stability for our customers.

Regards,

Ian Galletly

Managing Director