Dairy Outlook: Nearby Class III futures have fallen

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Dairy markets have been mostly down in the last month. Nearby Class III futures have fallen, while those for December and later are about the same. Of course the drop in Class III is tied to the cheese market. Cheese blocks have fallen $0.355 since last month, to about $1.78 per pound. The drop occurred in mid-August and cheese prices have gone nowhere since. Butter was steady until September 1, when it began a two week slide, dropping $0.20/lb., before stabilizing a week ago at $1.90/lb. The Class III futures price is $21.67/cwt. for August and averages $18.47 for the remainder of 2011 (see Table 1). Whey powder and nonfat dry milk prices moved in opposite directions once again, with whey powder up by 6.0% and nonfat dry milk powder down 1.6%.

The August Pennsylvania all-milk price was $0.20 higher than July at $23.70, the fourth consecutive month of increases. The Class IV price fell by $0.19 to $20.14/cwt. The Class IV futures prices average $18.61/cwt. for the rest of 2011. Together these values imply a Pennsylvania all-milk price for the rest of 2011 of $21.54. For the entire year, the forecast average is $21.79, $3.51 above the 2010 average price. Taken as a group, the outlook for dairy prices for the rest of the year is lower, but still better than the same months in 2010. The forecast prices for the first half of 2012, based on the futures prices, are also shown in Table 1. These prices imply a PA all-milk price of $20.05/cwt. for the first seven months of 2012, the same as last month. The forecast all-milk price for this period is $1.56/cwt. less than the 2011 average for the same months. If feed costs remain high, margins will be squeezed in 2012. Certainly most Pennsylvania farmers will not produce the feed they need for the next year in 2011, and will have to buy at high prices to replace what they lost.

Although the value of the dollar remains at very low levels, it rose compared to the currencies I follow in the past month. Since last month, the Australian dollar fell 1.7% against the greenback, and the New Zealand dollar fell 1.8%. The roller coaster for the Euro continues. Recent days have seen more uncertainty about whether Germany and France will support the Greek debt. Bank regulators are considering whether banks in these countries should mark down Greek debt to market levels, which would endanger reserve levels for many banks. Standard and Poors may lower the ratings for several large French banks. Like our own budget reduction efforts, much of the progress in the Euro zone is illusory. The Euro finished at $1.38, down 3.6% from last month.

Corn and Soybean Markets
Corn markets rose in the August to almost $7.80 for the December contract, and then dropped below $7.00 in September. The latest close was $6.92, unchanged from last month. Beans followed a similar path, closing at $13.55, up 20 cents from last month, but having hit $14.60 in the interim. August soybean meal is $349/ton, about the same as last month. Despite a variety of bad news about the 2011 crops, the market keeps falling.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs rose by $0.47/cow/day in August to $9.56/cow/day, up 5.2% from its July level. The PA all-milk price was up $.10 at $23.70/cwt. Feed cost fell by $0.34/cow/day, mainly because the USDA estimate of Pennsylvania hay prices in August was $40/ton less than its July estimate. I wondered about the accuracy of the July estimate last month, but found some transactions to support it. The market this time of year is very local and variable, but the August value of $177/ton is more consistent with the prior months. Corn and soybean meal prices rose in August, but not by too much. 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. Given the lower milk prices that apparently are ahead, the income over feed cost will be falling.

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 August PA Milk Margin was up 5% from July.

The feed cost was down this month. However, 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. The September floods from Hurricane Irene and Tropical Storm Lee affected some areas, although how much it will mean to crops is still unknown. I know some areas were hit hard. Given the poor corn silage crop, I expect some corn for grain to be harvested as silage, with corn brought in from the Midwest to replace the shortfall. The corn basis is at historically high levels, and will probably remain high through the harvest because of the small 2011 crop. I expect Pennsylvania to import corn from the Midwest at record levels until the 2012 harvest. Wheat has been fed to replace corn in recent months and the wheat price is still below corn. However, the wheat available for feed is being depleted, especially given the terrible hard red winter wheat crop from Texas and Oklahoma.

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 July 2011 is 0.9% above July 2010, exactly the same as in May and June. July milk production is also above the prior year by 0.7%. Therefore the increased production is entirely because of more cows, while production per cow is down slightly. The very hot weather in July throughout much of the country certainly was a factor in the drop in milk per cow.

A Longer Run View: Milk Per Cow
Figure 4 shows the monthly milk per cow for the last few years, normalized for 30 day months. As you can see, the milk per cow for July 2011 was below July 2010, and the monthly increase over the corresponding month the previous year has fallen steadily since October 2010. USDA in their latest World Supply and Demand Estimates forecasted that higher feed prices would lower the rate of growth in milk per cow. Given that milk per cow is averaging only 0.7% above last year for 2011 so far, and actually shrunk in July, lower growth in milk per cow may mean shrinking, not growth. USDA anticipates a larger herd, so the total milk supply is forecast to be 1.45% over 2011. Of course, milk per cow is partially determined by conscious actions by farmers and partially is a response to weather. Over the past decade the average growth rate was 1.6%, with no apparent trend. Although the monthly patterns in milk production are not as pronounced as when most cows were on pasture, the normalized milk per cow in May averaged 7.3% more than October for the past decade.

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