02/27/06 Milk prices up or down?

There might be some mixed messages being sent by dairy industry analysts and economists about price trends in the coming months. Will prices for 2006 continue to remain strong or will there be a decrease? U.S.D.A. livestock economist Shayle Shagam is one of those who believe that there may be a small dip in milk prices on the way. SHAGAM: The good returns that we have seen over the past two years have encouraged the sector to expand. Plus a combination of relatively good feed costs and a return to normal allocations of b.s.t. from previous years, and we're basically looking at about three per cent higher growth in 2006 production. Shagam's forecast is based on not only increased output, but also on less growth in consumer demand. SHAGAM: In terms of the price side of things, 2004, if you want to think about it, was a time where prices rose to ration supplies. Demand was much stronger than supply. 2005, we began to see prices come into line. And we saw prices come down to balance the supplies with demand. 2006 will be a very similar situation to 2005. We expect to see lower prices as a result of increased production, and the fact that we are not expecting demand to grow as rapidly as our production growth. But now compare that to the analysis of Dr. Alejandro Reca, the Executive Director of Food and Agri-Business Research for Rabobank. He feels long term prices for U.S. milk products will be higher. He bases his analysis on what he sees as liberal global ag trade agreements, especially with Asian nations which have consumers with an increasing demand for dairy products. In fact, Reca offers one long-term scenario where California alone could end up providing milk and dairy goods for much of Asia, while the rest of the U.S. dairy industry just handles domestic production. RECA: There is domestic demand. And there is world demand. And this would be the interesting paradigm if you want, that the last eighteen months you had increasing production levels in the U.S. as an aggregate, with prices received by the producers that have been increasing. Yes, I am aware that the last two months show declining prices, but we see that as a recombination of some forces. But overall, we are facing scenarios of higher domestic prices, as well as higher world prices as well. Another upside to the increasing U.S. dairy production is with inhibiting factors in place for other global competitors to expand, the U.S. could become a large player in the world dairy markets. SHAGAM: Prices that are going to be lower than those that we saw in either 2004 or 2005 but still well above where we were in the early part of the decade.