Dairy Outlook: Dairy markets moving in opposite directions

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Dairy markets have been moving in opposite directions for much of the past month. For example, the block cheese price rose steadily from $1.72/lb. to $2.00, before dropping sharply Friday the 18th to $1.83. In contrast, butter started November at $1.88/lb., but had fallen steadily to $1.65 on the 18th. Of course this meant that Class III and Class IV price spent much of the month going in opposite directions, before cheese prices collapsed suddenly. Non-fat dry milk fell by 5.25 cts/lb. since last month, while whey prices rose by 1.75 cts/lb. to $62.25 cents.

The October Pennsylvania all-milk price was $1.50 lower than September at $22.30. The Class III price fell by $1.04 to $18.03/cwt. The Class III futures prices average $18.68/cwt. for the rest of 2011. The Class IV price fell by $1.12 to $18.41/cwt. The Class IV futures prices average $17.70/cwt. for the rest of 2011. Together these values imply a Pennsylvania all-milk price for the rest of 2011 of $21.31, or $1 less than in October. For all of 2011, the average price is $22.04, $3.76 above the 2010 average. The forecast all-milk prices for the first eight months of 2012, based on the futures prices, are also shown in Table 1. These prices imply a PA all-milk price of $19.95/cwt. for the first eight months of 2012, an increase from last month. The forecast all-milk price for this period is $2.03/cwt. less than the 2011 average for the same months. If feed costs remain high, margins will be squeezed in 2012. Most northeastern dairy farmers will have to buy feed in 2012 to replace their crops lost to weather in 2011, and will pay high prices. Some products, especially corn silage, are very short, while some, especially alfalfa hay, are of poor quality.

The U.S. dollar has been strong in recent weeks, as the European situation remains murky. The New Zealand dollar in particular fell, dropping 4.6% against the American dollar since last month and 8.9% in the past three months. Europe continues to have its challenges, with changes in government in Greece and Italy in response to their debt crises, and considerable uncertainty about what will happens. The average citizen in both countries does not support reduced government expenditures or higher taxes, but the situation in both countries, and several others, seems to leave little choice. On the home front, the economic news is slightly better than last month. The stronger dollar and greater milk production in Australia and New Zealand do not bode well for American dairy exports.

Corn and Soybean Markets
Corn markets have moved sideways for the last month, except for a 30 cents/bu. drop in the last few days, with the December contract now $6.10. Beans have drifted down gradually over the period, closing at $11.68, down $0.83 from last month. Soybean meal futures are down $25 for the December contract at $299/ton. Unlike earlier months, the prices of feed commodities have been more stable in the past month, with smaller day to day gyrations. The latest USDA corn estimates cut the 2011 crop by 120 million bushels. They also cut estimated feed usage by 100 million bushels, leaving estimated corn usage for the 2011 crop at 300 million bushels more than the crop, so lower corn prices seem unlikely. This means estimated ending stocks for August 31, 2012 at 24.4 days usage, the lowest value since the 1995/96 crop year. The estimated soybean crop has also been reduced because of lower yields. However, soybean exports are expected to drop, which should keep soybean prices about where they are.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs fell by $1.07/cow/day in October to $9.08/cow/day, down 10.7% from its September level. The PA all-milk price was down $1.50 at $22.30/cwt. Feed cost rose by $0.12/cow/day, with the USDA estimate of Pennsylvania hay prices in September up $26/ton over the September estimate. Corn prices were down, as were soybean meal prices. 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 dropped to about its level from a year earlier, after rising through most of 2011. Given the lower milk prices ahead, the income over feed cost will be falling, maybe a lot.

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 the October PA milk margin was down 10.8% from September.

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. Cow numbers rose by 9,000 animals. The national dairy herd is 1.0% larger than last year at the same time. Milk production is above the prior year by 2.0%, a wider increment than a year earlier. After falling toward last year’s levels for several months, in the last three months milk production has been above last year, with the gap widening. If exports drop, prices will as well, since the domestic market can’t absorb the additional milk.

A Longer Run View: Changes in Milk Usage in the Northeast Order
I attended a dairy outlook meeting in Albany this week at the Northeast Milk Marketing Order and Peter Fredericks presented a version of Figures 4 and 5. They provide some valuable insights into a couple trends in milk usage in the region. Figure 4 shows the monthly data for the share of milk going to the different classes of milk and Figure 5 shows the 12 month moving average of the same data. The first observation is how much seasonality there is in milk usage. Of course this is the result of both supply and demand. As Figure 3 shows, milk production still has considerable seasonality. In addition, there is seasonality in consumption of dairy products, with differences during the summer and holiday season in particular. People drink less milk during the summer, and more during the school year. Baking and other food preparation increases during the holiday seasons. Figure 4 shows these fluctuations vividly. Class IV (butter and powder) usage increases when there is a surplus of milk, since these are the most storable products. The amplitude of the swings in Class IV usage is less in recent years as the milk surplus in the region is less. Class III (cheese) usage has decreased since 2000, especially in 2004 when some cheese plants closed. Class II (soft products, such as ice cream, cottage cheese and yogurt) usage has increased over the period, with an increase in yogurt consumption, and more recently Greek yogurt consumption. Greek yogurt uses more milk to produce to produce an ounce of yogurt than traditional yogurt, and its popularity has led to increased production sharply in the region. Class I (drinking milk) consumption has become a bit less important in recent years. Total Class I usage is down considerably in the region, dropping from an average of almost 7.5 billion pounds in 2000-02 to 5.6 billion pounds in 2008-10.

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Source: Jim Dunn, Professor of Agricultural Economics, Penn State University, Market Psychology

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