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dairy analysis

In the US, dairy has a farm value of production that makes it second only to beef. Despite increasing efficiency of production, domestic dairy demand has remained so high that US dairy farmers have found little incentive to export abroad. Significant export activity is limited to powdered milk and cheese to Mexico. But, the US imports large quantities of dairy products, especially relatively expensive cheese products from the European Union.

Milk when referred to as a commodity generally means cow’s milk, specifically Class III Milk. Milk Class III futures are traded on the Chicago Mercantile Exchange under ticker symbol DA in cents per hundredweight.

Dairy prices are historically relatively stable. However, even small fluctuations in price can have a big effect on related companies. The USDA projects that a slight increase in the number of milk-producing cows and increasing milk production efficiency will result in a continued drop in domestic dairy prices. The minimum price of raw milk is regulated in most parts of the country by the government at $9.90, but ever since Cooperatives Working Together (CWT), a dairy farmers group, put into place initiatives in 2002 to control milk supply by retiring herds, milk price have shot up and have remained higher.

Who Wins From Lower Domestic Dairy Prices?

  • McDonald’s (MCD) and Yum! Brands (YUM) are examples of giant fast food restaurant chains that use large quantities of domestic dairy in their offerings.
    Starbucks (SBUX), Peet’s Coffee & Tea (PEET), Friendly Ice Cream (FRN), and other stores with high dairy consumption also gain from lower domestic dairy prices.
  • Kraft Foods (KFT), Dannon (OTC:GDNNY), and Dean Foods Company (DF) are all major producers of packaged dairy products. Lower domestic dairy prices means potential higher profit margins for these producers.

Who Loses From Lower Domestic Dairy Prices?

  • Hain Celestial Group (HAIN) is a major producer of soy products, often seen as competing with dairy products for demand and consumption. Lower dairy prices may worsen the price difference and discourage commercial consumers from turning to slightly pricier soy alternatives.
  • AspenBio Pharma (OTC:APNB) and other companies that derive significant profit from manufacturing dairy-related bovine hormones may feel the strain of lower dairy prices through the purchasing capacity and demand of bovine farmers for more yield-increasing drugs.

The New Export Market

A growing export market may counteract the effect of domestic dairy price drops. Chinese dairy consumption is growing at an annual 15%, and many other developing countries weigh in at about 10% — comparing such numbers to the US’s annual domestic consumption growth of a paltry 0.4% has led many to believe that China could be the US’s next big dairy surplus export market.

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