The FAO Dairy Price Index: A Global Benchmark
When a story says global dairy prices rose or fell, it often points to an index published by the United Nations food agency. Understanding what that index is, and is not, keeps you from over-reading a headline.
What is the index?
The Food and Agriculture Organization of the United Nations publishes a family of food price indices, and one of them tracks international prices for dairy products. It is built from traded prices for commodities such as butter, cheese and milk powders, weighted by trade share. The FAO site explains the method, and you should read it for the current definition and base period.
Because it is an index, it shows relative change, not a price you can bank. It tells you whether world dairy commodity prices are moving up or down compared with earlier periods.
Some people confuse the index with a futures price. It is not a contract you can trade, and it does not tell you what price a buyer will pay tomorrow. It is a summary of what already happened in world markets, built from observed price data, so it describes the recent past more than the future.
How is it different from your milk price?
Your milk check depends on your federal order or contract, your components, your processor's product mix and your hauling costs. The world index reflects a different basket of products and different markets, often dominated by large exporting regions.
Even so, the two often move in the same general direction over time, because the United States is part of the global dairy trade. A strong world market can pull U.S. powder and cheese prices upward, while a weak one may drag them down. Compare it with the U.S. numbers in Dairy Market News and the Economic Research Service outlooks.
- World price index: traded commodities
- Your price: order, contract, components
- Both: shaped by supply, demand and currency
Why does currency matter?
World dairy trade is largely priced in dollars, but producers and buyers around the world earn and spend in other currencies. When the dollar strengthens, U.S. products become pricier for foreign buyers, and when it weakens they become more competitive. An index can move for currency reasons even if local conditions have not changed much.
The Federal Reserve and FRED publish exchange rate data, which can help you see whether a price move has a currency story behind it.
How should you use it as a producer?
Treat it as a thermometer, not a thermostat. A rising index might support firmer U.S. prices, but it does not set them. A falling index could be a warning to check your cost of production and your risk coverage, including options like Dairy Margin Coverage, whose terms you should verify with FSA.
Pair the index with your own numbers. Know your feed cost per hundredweight and your breakeven. The dairy herd care guide and farm money guide on our sister sites help with that.
Over at farm.FM the writers in the satire section sometimes joke that the index moves whenever the person talking about it needs it to. The serious answer is the long view: read several months at once, and compare against your own costs before changing any plan.
What can mislead you?
Headlines often say prices jumped or crashed without telling you the base or the period. A percentage move in an index can also be small in dollar terms. Look at the long run, not just the last month.
Also remember that an index mixes products. A rise in butter and a fall in powder can net out. Always check which components moved, and read the explanation that comes with each release.
Where can you follow along?
Check the FAO website itself for each release and its methodology. For farm-flavored commentary with a lighter touch, visit dairy stories at farm.FM, which sometimes pokes at the same market swings, and see a farm.FM story on global dairy prices.
The U.S. Dairy Export Council also posts market commentary. Our site is independent of the FAO and the United Nations, so rely on them for every number.
It also helps to ask your processor how its product mix connects to global prices. A plant that makes mostly cheese for the domestic market will feel the world index differently from one that makes powder for export.
Sources and further reading
- USDA Dairy Market News: weekly dairy price reports
- USDA Economic Research Service: farm economy data and analysis
- Federal Reserve: U.S. central bank
- FRED: Federal Reserve economic data
- Dairy Margin Coverage: FSA Dairy Margin Coverage program
- U.S. Dairy Export Council: dairy exports
Ask locally: Ask a dairy economist at your state Extension service or a cooperative analyst how global prices are showing up in your milk check.