Dick Groves
Editor, Cheese Reporter


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Will We Ever See 2014-Level Prices Again?

It’s usually not a good idea to make predictions about dairy prices, but here’s one that seems reasonably safe at this time: most if not all of the price records that were set in 2014 will not be broken in 2015.

But what about over the longer term? Will those 2014 records survive through the end of this decade? Will they survive through, say, 2025?

What prompted these questions were a couple of agriculture baselines released earlier this year, the first by the US Department of Agriculture and the other by the Food and Agricultural Policy Research Institute (FAPRI). Both of these baselines carry projections through the year 2024, or a decade after the record-setting 2014.

USDA’s baseline projects that, between 2015 and 2024, cheese prices will average between $1.73 and $1.63 per pound, down from last year’s record-high average of $2.18 per pound. In other words, USDA is projecting that cheese prices over the next decade will average 45 cents or more below last year’s average.

Butter prices averaged $2.14 a pound last year, and are projected to average $1.72 per pound this year and then no higher than $1.55 per pound between 2016 and 2024. And after averaging $24.20 per hundredweight last year, the all milk price is projected to average under $20.00 per hundred every year through 2024 (and under $19.00 per hundred from 2016 through 2023).

FAPRI’s projections are similar. For example, FAPRI’s baseline notes that the CME 40-pound Cheddar block price averaged $2.11 a pound last year (USDA’s baseline appears to use prices from the weekly AMS “National Dairy Products Sales Report”), and then isn’t projected to average above $1.71 per pound through 2024.

For butter, after averaging $2.16 per pound on the CME last year, FAPRI’s projections show an average butter price of $1.52 per pound this year and then average butter prices under $1.50 per pound through 2024.

FAPRI’s milk price projections are more detailed than are USDA’s. FAPRI projects that, after averaging a record-high $22.34 per hundred last year, the federal order Class III price won’t average above $17.34 per hundred through 2024. And after averaging $22.09 per hundred in 2014, the Class IV price isn’t projected to average higher than $17.14 per hundred through 2024.
And the all milk price isn’t projected to average $20.00 per hundred over the next decade, and in fact isn’t projected by FAPRI to even reach an average of $19.00 per hundred until 2021.

So according to these baseline projections, not only will those 2014 price records not be broken between now and 2024, we won’t even come close to breaking those records.

And that prompts the question of whether these projections will prove to be correct over the next decade. There are a couple of ways of looking at that question.

First, it’s worth remembering exactly what these baselines are. Here’s how USDA explained it: “The projections are a conditional scenario based on specific assumptions about the macroeconomy, agricultural and trade policies, the weather, and international developments. The report assumes that there are no domestic or external shocks that would affect global agricultural markets. Normal weather with trend crop production yields is generally assumed.”

Figures reported in FAPRI’s baseline represent the average of 500 alternative outcomes based on different assumptions about the weather, oil prices and other factors.

Both baselines assume that provisions of the 2014 farm bill remain in effect through the projection period.
That alone says something about the projections, since many key provisions in the current farm bill expire in 2018 and it’s likely that one and possibly two new farm bills will be written by 2024.

The baselines also assume “normal” weather, whatever that is. “Normal” weather is, frankly, something that doesn’t exist. Since the turn of the century, dairy prices have been influenced by, among other things, extreme drought, extreme heat, extreme cold, and extreme precipitation. We’re extremely confident that the next decade will also see examples of all of these extremes, each of which could push prices above, perhaps well above, the projections contained in the USDA and FAPRI reports.

To provide some perspective on this point, we went back to FAPRI’s 2008 baseline report, which projected a 2014 Class III price average of $14.66 per hundred and a 2014 CME 40-pound Cheddar block average price of $1.63 per pound.

Another way to look at these price projections is to remember how long some price records were around before they were broken last year. For example, prior to last year, the previous record for the CME butter price was set back in 1998. Based on that fact, it could be predicted that the current butter price record won’t be broken over the next decade.

By comparison, the cheese price records that were broken last year mostly dated back to 2008, which would seem to indicate that we’ll see new cheese price records established before 2025.

What about the federal order Class III price? That’s even more difficult to predict. For one thing, will the Class III price formula in 2024 be identical to the Class III price formula here in 2015? And will there even be a Class III price in 2024?

The recently released USDA and FAPRI ag baseline reports indicate that 2014 prices were an anomaly. Dairy price history tells us we can expect at least a few more anomalies over the next decade.

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