Introduction to understanding dairy markets

Dairy markets are historically the most volatile of the agriculture markets. To survive and thrive in the industry, it’s all about balance. Dairy traders help the industry achieve that balance.

In the perfect world, dairy markets are balanced when supply matches demand and there is no shortage or surplus of product. While no market can be perfectly balanced, traders help get as close to it as possible, allowing producers to avoid wasting product and processors to keep their plants running.

One of the biggest keys to understanding dairy markets is understanding the many ways balance is achieved.

Methods of balancing

Balancing the industry begins by having a broad network of buyers and sellers, both domestically and globally. That allows traders to match organizations who have more product than they need with those who don’t have enough. It’s merely a matter of striking a deal and setting up the logistics.

That’s the simplest balancing method, but it’s also critically important. In the case of fluid milk, the alternative to finding a home for surplus product if a local milkshed is at capacity is to pour it down the drain.

U.S. milk sheds

Milksheds in the U.S. indicate where most of the nation’s milk supply is produced and collected.

International milksheds show where most of the world’s milk is produced and collected.

More options are available for products that are better fit for storage, such as cheese, butter or powders. In those cases, traders will purchase these products and store them until a later date when demand is strong and prices are potentially better.

Storage is an important balancing option for handlers, too. Because milk has such a limited shelf life, handlers are forced convert excess milk into something more storeable. By trading one kind of capacity for another, surplus milk is turned into something that’s sold instead of wasted.

On the other side of the coin, processors who have extra capacity after meeting their obligations turn to traders to find excess milk they can process. That maximizes the efficiency of their processing plants. When plants stay at capacity, they stay profitable.

Another balancing option is to export. Traders watch worldwide industry signals just as closely as they do domestic ones so that, should the circumstances arise, their customers have yet another balancing option.

Simply put, understanding dairy markets allows stakeholders to make decisions that keep the wheels turning.

Market cycles, time and place

While the industry is unpredictable, recognizing a few important truths about how dairy products are made and consumed goes a long way to maintaining an even keel. Consider the following:

Seasonality – Milk production in the U.S. peaks in May during the spring flush. It drops off steadily during the summer months and typically bottoms out in late October or early November. As you’ll read below, a quirk of the dairy industry is that greater demand for products occurs when milk production is naturally low.

Weather and climate – Severe weather events can alter milk production. For example, extended heat waves, widespread flooding or major snowstorms negatively impact herds and destroy feed crops, affecting production in both the short and long term. Climate plays a role, too, especially in North America where it varies from region to region. For example, the spring flush arrives a bit earlier in the West and Southwest. It comes a bit later in the upper Midwest and Mid-east, and later still in the northeastern U.S. and southern Canada.

Production problems – Dairy traders are especially valuable when regional problems put the supply chain in jeopardy. For example, droughts can decimate herds. Snowstorms can halt milk transport. In the case of a drought or extended heat wave, cows get exhausted and produce much less milk. In the case of a snowstorm or other significant weather event, impacted transport lanes keep trucks from collecting milk, forcing producers to waste it.

With supplies suddenly short, demand for dairy products elsewhere will surge, and traders will need to keep processors supplied with milk from elsewhere until things get back to normal.

Consumption trends – The way we consume dairy products throughout the year changes. Here are some classic examples:

  • Obviously, far more ice cream is consumed in the hot summer months than at any other time.
  • Per capita butter consumption in November and December is almost twice what it is the rest of the year.
  • Fluid milk consumption dramatically increases during the traditional school year due as milk is included in more meals at school and at home.
  • Demand for cheese destined for pizza spikes during college semesters and drops off during breaks; demand for sliced cheese for burgers surges in the summer months when more people grill out.

As the examples clearly show, consumption trends are quite independent of milk production trends. Traders help keep inventories balanced in both the short and long term.

Observing federal and state milk marketing orders

Another important job for traders is observing the minimum fluid milk prices set by the Federal Milk Marketing Orders (FMMOs) and individual state orders.

U.S. Federal Milk Marketing Order regions

Federal Milk Marketing Orders set minimum fluid milk prices based on the region the milk came from and what its end use will be. Areas not highlighted in this map are either covered by state orders —which work in much the same way as federal orders— or are not regulated.

Different Federal Orders have different rules. Variations in pooling and qualification rules in the different orders require traders to understand the advantages and disadvantages of moving milk between orders at a given time. Traders use this knowledge to do business between certain Federal Orders with the goal of increasing the milk price for their customers.

Price certainty and risk management

Traders working to balance supply inevitably are aware of how that impacts prices. That knowledge is critical for customers whose profitability depends a great deal on their ability to limit risk and secure fixed prices for products.

Traders help secure fixed prices for products by trading in commodity futures markets like the Chicago Mercantile Exchange.

Certainty is good for industry stakeholders, but it’s also good for end users. The stability achieved through fixed prices over time ensures consumers are insulated from the day-to-day swings in price inherent in commodity markets.

A trusted name in dairy

By understanding dairy markets, T.C. Jacoby & Co. balances the dairy industry for the benefit of all who work in it.

We started building a business —and a reputation— in 1949, collecting a bank of industry knowledge and earning the trust of thousands of customers across the U.S. and globally. By being more skilled, more knowledgeable and easier to work with, T.C. Jacoby & Co. has helped build one of the world’s critical industries and ensured the health and safety of its consumers.