Through August, US producer milk prices remained high, but the growing export market is struggling.
Because exports from the US are now over 15% of production, reduced or stagnant export levels will cause a decline in producer milk prices. International factors are now the most important element influencing domestic US producer milk prices.
The US exports for July (the most current data available) were down 9% by weight.
The largest export item, Nonfat Dry Milk/Skim Milk Powder (NDM/SMP), was down 17% in pounds.
A domestic price drop has also been expected for NDM/SMP as international prices have fallen.
Most of the NDM/SMP produced in the US is exported, so the domestic price reflects the international price.
The chart below illustrates the drop in 2014 prices of NDM/SMP.
Through 2013, NDM/SMP exports kept producer milk prices high, but that leg of the equation is already falling with no expected change in the near future.
The price support contributed by the price of NDM/SMP has, for now, been replaced with record high butter prices keeping producer prices at record highs.
Why are butter prices so high? During late 2013 and early 2014, butter exports hit record levels.
This level of exports could not be maintained as there was not sufficient butter churning to meet this demand. US butter inventories fell to very low levels and butter and butterfat prices skyrocketed to record levels.
This has kept producer milk prices at very high levels in spite of the falling NDM/SMP prices.
However, butter exports fell to low levels beginning in the second quarter of 2014 and this should allow inventories to recover.
When butter inventories recover, the high butterfat prices that are keeping producer prices high will drop to more normal levels, and the overall price of milk will fall.
As a result, the US producer prices will take a significant drop.
Through the last few years, the growth in milk product exports have kept producer milk prices very high. Producer milk prices in the US have always been volatile, but the new dependence on exports is increasing that volatility. Domestic milk prices are now subject to international exchange rates and international events.
Only producers with deep pockets will be able to keep their facilities and herds in good operating condition with these swings.
The number of the family dairy farms will continue to decline.
In order to stay financially fit, only large operators with solid management tools and good business knowledge will be able to meet the demands of the volatile US dairy markets.
John Geuss (left) is the editor of US dairy commodities blog, MilkPrice.
For John's detailed month-by-month examination of American dairy commodity movements, click here .