Dairy farmer income margins improved since the middle of July, following a combination of both higher milk prices and lower feed costs, according to the latest CIH Margin Watch report from Commodity & Ingredient Hedging, LLC.

Margins remain very strong, well above the 90th percentile of the past 10 years through the first half of 2015, offering excellent opportunities to establish forward protection.

Milk prices are drawing support from a decline in both cheese and butter stocks reported in the latest USDA Cold Storage report. Butter inventories on June 30 fell to 186 million lbs., down 3.3% from May and 41.6% lower than last year. The figure was also the lowest volume of butter stocks for the end of June in almost 10 years. Cheese stocks also declined to 1.06 billion lbs. as of June 30, down 0.4% from May and 7.6% lower than last year.

There are head winds, though, for milk prices moving forward. China’s milk powder imports appear to be slowing, with June imports of whole milk powder  down 33% from May on a daily average basis. Fonterra’s latest forecast for farmgate milk prices is down from their initial estimate, due to declining global dairy prices and high stocks in China. There are also signs of U.S. expansion, with a continued decline in dairy cow slaughter, down 9.4% year-to-date.

Feed costs remain contained, as corn has sunk to new lows on expectations of higher yields to be forecast in the upcoming August WASDE. Crop conditions at 75% good-excellent are the highest since 2004 for late July, and the fifth best crop rating for this time since records began in 1986.

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