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AS THE GROWTH in global demand for dairy products declined in 2014, international dairy product prices weakened, as well.
However, United States (US) butter and cheese prices stayed well above world prices for much of 2014 as domestic demand for these products remained strong. This US to international price difference narrowed significantly late this year.
Dairy product demand from China remains an important piece of the 2015 milk price puzzle. Although it appears Chinese demand will strengthen in 2015, it may be late 2015 before significant global price builds momentum.
If Chinese demand were to falter significantly, US milk prices would come under even more downside pressure.
The level of milk supplies from Oceania and the European Union (EU) will also affect international dairy prices. EU quota elimination opens up the possibility of additional milk supplies in 2015. With an almost ideal growing season, crop prices moved significantly lower in 2014.
Corn prices have been cut in half from their drought-induced peak of just a few years ago. Other feedstuffs have seen similar reductions. The drop in feed costs is the primary reason that 2015 dairy returns will remain at a reasonable level.
Although discussion of higher crop prices seems difficult to imagine with the bumper crops produced this year, a drought in 2015 would push feed stuff prices higher later next year.
If this would occur, it would become a key event that turns 2015 into a year dairy producers would want to forget. However, another great growing season in 2015 will ensure inexpensive feedstuffs throughout the entire year. Dairy producers have found that record cattle prices have resulted in added returns to the financial statement.
Cattle supplies remain extremely tight with inventories at levels not seen since the early 1950s. The accelerated use of beef semen in the dairy industry points to 2015 cattle prices providing another boost to dairy producer returns.
One new piece of information that has resulted from the passage of the Agricultural Act of 2014 (Farm Bill) that can be used to describe the financial health of the dairy industry is the margin in the margin protection programme (MPP). This national income less feed costs margin can help illuminate the two most important factors in producer returns, milk price and feed costs.
Although the MPP is calculated on a bi-monthly basis, an annual average of the bi-monthly margins can provide an estimate of the financial situation in the coming year.
The 2015 estimate for milk prices has an annual decline that rivals the 2009 reduction of US$5.52 per hundred weight when compared to the previous year.
Class three prices for July 2009 were US$14.44 per hundred weight. In reality, class three prices in July 2009 fell to less than US$10 per hundred weight.
Dairy producers need to look carefully at ways to reduce the downside risk to their 2015 returns.
Although it appears the year will remain a reasonable one for producer returns, changes in international markets, domestic milk supplies and weather could turn 2015 into an extremely tough year.
Dr Scott Brown is a research assistant professor at the University of Missouri.