A study by a British dairy consulting firm, Landell-Mills, predicts global economic and population growth will result in increased demand for dairy products by more than one million tons by 2010.

Marc Beck, senior vice president of marketing at the U.S. Dairy Export Council, reported in Monday’s “DMI Update” that the increased demand spells opportunity for U.S. producers because the projected increase will “strain the ability of the world’s major dairy suppliers to meet demand.”

For example, the European Union’s ability to export more will be limited due to production quotas, according to the study, and New Zealand will be “pinched to increase its production,” Beck said, because of competing, more profitable land uses, and Australia farmers face increasing water shortages.

Landell Mills says supply increases from these countries would only be able to cover a half to three-quarters of the demand increase and that will leave a large deficit of about 600,000 tons.

“Even if New Zealand, Australia and others could provide a 50 percent greater supply, Landell Mills still projects a 320,000 ton shortfall,” Beck said.

“With its ample capacity and infrastructure,” the forecasting firm says. “The United States is best positioned to increase its dairy exports to meet the projected gap.”

The U.S. would only need to increase production by .5 to .7 percent per year for the next five years to fill the gap, Beck concluded. “So this could translate into a significant business opportunity for the U.S. dairy industry,” he said.

Export demand has kept domestic nonfat dry milk prices strong the last two years, according to Al Levitt, editor of the CME’s Daily Dairy Report. Speaking in Tuesday’s DairyLine, Levitt said people are starting to pay more attention to the powder market, a market that characteristically doesn’t get a lot of attention and hasn’t received much credit for boosting farm income.

“It’s (the powder market) actually had a huge affect on milk prices even though it doesn’t plug directly into the Class III price which is what a lot of people focus on,” Levitt said. Every penny movement in the nonfat price means 8.6 cents on the Class II and Class IV milk price, according to Levitt, and those two classes make up about a quarter of milk utilization in the U.S.

Nonfat prices are currently about 20 cents higher than they were two years ago, he explained, “Which means you could reasonably say that Class II and Class IV prices are $1.72 higher than they would have been if nonfat prices were still close to the support price of 80 cents per pound.”

The windfall is not evenly distributed, Levitt admitted, because order utilizations are different. Only about 15 percent Upper Midwest order milk goes into Class II and Class IV, he said, while it’s close to only 10 percent in the Florida order.

Class II and IV utilization is over 40 percent in the Pacific Northwest and over 30 percent in the Southwest. The Boston order averages around 30 percent, according to Levitt, and while California is not part of the Federal order program, its Class II and IV utilization runs 30-40 percent.

“It makes a big difference to farmer’s milk checks,” Levitt said, but current powder prices are showing some weakness. A lot of people are wondering if export demand will continue, he concluded, “Or is there a little bit of a crack there?”

Market analyst Jerry Dryer said he’s optimistic on powder prices. Speaking in Wednes-day’s broadcast, Dryer said powder has been moving higher for two years after hovering close to the government support price of 80 cents.

“They marched steadily higher to a dollar,” he said, “And didn’t really start to waffle until we got into that $1.00 range.” He admits that there may be some softness right now but he doesn’t see prices falling back to support and he expects them to continue to make good contributions to farm milk prices.

He based his prediction on strong international demand for skim milk powder, which he said is what helped move the prices higher in the first place. The U.S price has tended to lag behind the world price, he explained, but “It finally caught up so prices are now at parity and are high enough to temper demand a bit.”

Mexico, which has been a steady U.S. customer, is “temporarily messing around with tariffs between the two countries,” according to Dryer, and “The dollar has flexed its muscle and has strengthened but it’s been a modest strength, so there are some glitches along the way.”

“The nonfat dry milk price is being dictated by supply and demand instead of a government edict,” Dryer said, just as whey, butter, and cheese prices have been for a long time. Nonfat dry milk is “finally playing in the real world,” he said.

The underlying fundamentals do not dictate a collapse, according to Dryer. World demand is strong, economies around the world are picking up steam, and the kind of dairy proteins the U.S. is producing is not just nonfat dry milk, but includes skim milk powder and milk protein concentrate and “They’re in good demand and the world supply just isn’t that abundant. We are one of the reservoirs for dry dairy proteins,” he concluded.

There’s little concern that the U.S. will run out of milk. The USDA’s latest preliminary estimate on production is for December and came in at 13.6 billion pounds, up 4.2 percent from a year ago. December output per cow averaged 1,665 pounds, up 55 from a year ago. Cow numbers totaled 8.16 million, up 4,000 from November and 67,000 above a year ago.

The CME’s Daily Dairy Report says cow numbers for the 50 states were revised lower for October and November likely reflecting the CWT herd removals.

The CWT however reported removals of 64,069 head, while the USDA reports a net decline of just 11,000 in October and November and an increase of 8,000 in December. The DDR says 2005 cow numbers were up 41,000 from 2004 despite the two CWT slaughter programs. Keep in mind, the USDA’s data is an estimate and revisions in next month’s report may change the picture.

California’s December production was up 2.8 percent, thanks to 29,000 more cows and 20 pounds more per cow. Wisconsin was up 4.6 percent with output per cow up 65 pounds.

New Mexico had the biggest increase, up 13.8 percent, with 18,000 more cows and output per cow up 130 pounds. The biggest decrease was in Florida, down 4.5 percent.

Meanwhile, cash cheese prices showed little reaction to the Milk Production report. Things seem to be in equalibrium, said Al Levitt, editor of the CME’s Daily Dairy Report, in Tuesday’s broadcast, although the butter market remains weak as inventories climb.

Published in the January 25, 2006 issue of Farm World.