Nearby milk and dairy product prices have risen, and the outlook for the rest of the year is decidedly better than at this time last month. In mid July cheese blocks rose to about $2.15 per pound, and although they dropped 2 cents on August 4, whenever they have seemed shaky, they stabilized as buyers materialize. Cheese blocks have closed about $2.00/lb. for 45 consecutive trading days. The Class III futures price is $21.50/cwt. for August and above $17.50 for the remainder of 2011 (see Table 1). Butter prices are at $2.1025/lb., up 7.25 cents from last month. The spot price has been above $2.10 since late July. Whey powder and nonfat dry milk prices moved in opposite directions since last month, with whey powder up by 2.4% and nonfat dry milk powder down 7.2%. Cheese inventories remain above the stock levels for the same month in recent years, but the increase over the comparable month last year is narrowing, which should remove some of the downward pressure on prices that high inventories can create.
The July Pennsylvania all-milk price was $1.00 dollar higher than June and $1.70 above May at $23.80/cwt. The July Class III price rose $2.28 over June to $21.39/cwt. Class IV prices fell by $0.72 to $19.98/cwt. The Class III futures prices average $19.42 for the rest of 2011, with prices dropping about $0.80/cwt. each month for the remainder of the year. The Class IV futures prices average $19.10/cwt. for the rest of 2011. Together these values imply a Pennsylvania all-milk price for the rest of 2011 of $22.28. For the entire year, the forecast average is $21.93, $3.65 above the 2010 average price. Taken as a group, the outlook for dairy prices for the rest of the year is lower, but still much better than the comparable months of 2010. I include forecasts for the first half of 2011, based on the futures prices, also shown in Table 1. These prices imply a PA all-milk price of $20.00/cwt. for the first seven months of 2012. Generally dairy futures markets expect average conditions that far in the future, so this forecast reflects that. In any case, the forecast all-milk price for this period is $1.94/cwt. less than the forecast 2011 average. If feed costs remain high, margins will be squeezed in 2012.
The value of the dollar remains at very low levels, much like last month. Since last month, the Australian dollar fell 2.2% against the greenback, and the New Zealand dollar rose 0.4%. World financial markets are very nervous, with the bailout of Greece adding further debt burden to Italy and Spain and other troubled European economies, and general uncertainly about the world’s economic outlook. The American solution to raising the debt limit, but deferring efforts to balance the budget, led to a lower government bond rating from Standard and Poors. Fronterra Cooperative Group in New Zealand, the world’s largest dairy exporter, responded negatively to the drop in the U.S. credit rating.
Corn and Soybean Markets
Despite all of the weather and economic news, corn markets changed little in the past month, with the December 2011 contract about 10 cents/bu. above last month. The price for the December contract is $7.03/bu. Unlike corn, soybeans dropped, with November 2011 beans at $13.36/bu. This is down about $0.20/bu. from last month, but well down from the highs between then and now. August soybean meal is $345/ton, down $2 from last month.
The weather in the northeast was very hot and dry in July, and the latest USDA crop moisture index has southern PA “excessively dry” and most of northern Pennsylvania “abnormally dry.” Based on my travels, the Pennsylvania corn crop is as variable as I can ever recall. Some was planted late, some was planted early, but the wet spring hurt root growth, some is very dry, and some has had recent rains. While it isn’t a scientific observation, I have seen a lot of fields that will produce very poor corn silage crops. USDA rates 7% of the PA corn crop excellent and 23% good. New York’s crop is considerably better, but is still 49% poor or fair.
Income over feed costs (IOFC)
Penn State’s measure of income over feed costs rose by $0.17/cow/day in July to $9.10/cow/day, up 1.9% from its June level. Although the PA all-milk price was up $1.00 at $23.80/cwt., feed cost rose by 48 cents/cow/day, offsetting much of the higher milk price. The higher feed costs were due to a $42/ton increase in hay prices, plus increases in soybean meal prices. The Pennsylvania corn price fell in July. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk. Figure 1 and Table 2 showing the monthly data are appended. Figure 1 shows that income over feed cost has been steady for the past several months.
The allocation of the revenue per hundred pounds of milk is shown in Table 3. The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. As with income over feed cost, this measure shows that July was up slightly from June, but still the highest since January 2008.
The feed cost was up this month, and it looks like dairy farmers in Pennsylvania, and probably elsewhere, will be buying a lot of feed to replace the corn silage that they will not get from their fields. There has been a discussion among our extension educators about corn silage prices, and the consensus is they will be very high. The wet spring and very hot July has certainly affected the hay crop as well. I expect feed costs to be at historically high levels for the remainder of 2011, and the first part of 2012.
Cow Numbers and Milk Production
Figures 2 and 3 show the monthly number of dairy cows on farms and the normalized monthly milk production for a 30-day month. In both cases, the figures show an increase year over year. In the case of cows, the national dairy herd in June 2011 is 0.89% above June 2010, exactly the same as in May. May milk production is also above the prior year by 1.0%. Therefore increased production is mostly because of more cows, but also reflects higher production per cow.
A Longer Run View: Exchange Rates
Figure 4 shows the relative exchange rates of Canada, New Zealand, Australia, and the Euro compared to the dollar. They are indexed compared to their January 2006 value. It is apparent that they have changed considerably over this period, dropping in 2007, rising in the fall of 2008 to a very high level by early 2009, and then falling sharply during 2009 and more since. The U.S dollar is only 70% of its January 2006 value compared to Australia and 81% to 85% for New Zealand, Canada, and the Euro. This means that things we buy with dollars from these countries are relatively more expensive for us, and things they buy from us are relatively cheaper. Since New Zealand, the European Union, and Australia are our main competitors in dairy exports, this means that in 2009 we were much less competitive than we are today. The export data reflects this and so does the milk price. If our surplus production of agricultural products has to find a market in the United States, domestic prices drop sharply. We have seen this with broilers during the Russian poultry embargoes in the past, and in 2009 in dairy markets.
Source: Jim Dunn, Professor of Agricultural Economics, Penn State University