Dairy margins continued to strengthen in the last half of January, led by an ongoing surge in nearby milk prices, according to the latest CIH Margin Watch report from Commodity & Ingredient Hedging, LLC.

Current first-quarter 2014 margins represent a new all-time high for profitability in the period, while second-quarter margins have not been this strong since 2004. Deferred margins in the second half of 2014 are comparatively not as strong, but remain above or near the 90th percentile of the past 10 years.

The strength in milk futures continues to be paced by record high cheese prices, with spot block cheddar at the CME and results from the latest Global Dairy Trade auction for cheddar each posting all-time highs at $2.295/lb. and $2.33/lb., respectively.

One potential headwind moving forward though is that U.S. prices have now caught up to world values for cheese, powder and butter, and our exports may start looking less competitive to certain markets as a result. Meanwhile, December milk production totaled 16.8 billion lbs., up 1.6% from November, but down slightly year-over-year. USDA reported a 2,000-head increase in milking cows, which was smaller than the normal seasonal increase of about 15,000. That would appear to indicate the heifer supply is short.

On the feed side, both corn and soybean meal have been relatively quiet for the past couple of weeks following the release of USDA’s January crop report. Both markets appear to have stabilized and remain supported by solid demand, with China maintaining a brisk import pace of soybeans and corn bid by nearby ethanol margin strength.

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