December dairy outlook: Block cheese price falls steadily

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Market Psychology
Dairy markets have been weak for much of the past month. For example, the block cheese price fell steadily from $1.83/lb. to its current $1.56. Butter was $1.65 last month at this time, and gradually fell to its current $1.60/lb. Of course this meant that Class III fell a lot and Class IV dropped a bit. Non-fat dry milk fell by 1/2 ct/lb. since last month to $1.40, while whey prices rose by 2 cts/lb. to 64.25 cents.

The November Pennsylvania all-milk price was $0.60 lower than October at $21.70. The November Class III price rose by the same $1.04 it lost in October and is back at $19.07/cwt. for November. The Class III futures price is $18.71/cwt. for December 2011. This will put the average Class III price for all of 2011 at $18.36, or $3.95/cwt. higher than the 2010 average. The Class IV price fell by $0.51 in November to $17.87/cwt. The Class IV futures price is now $17.05/cwt. for December 2011, which makes the average for 2011 $19.06/cwt., $3.98/cwt. above the 2010 average. Together these values imply a Pennsylvania allmilk price for December 2011 of $21.07, or $0.63 less than in November. For all of 2011, the average price is $22.06, $3.77 above the 2010 average. The forecast all-milk prices for 2012, based on the futures prices, are also shown in Table 1. These prices imply a PA all-milk price of $20.14/cwt. for 2012. The forecast all-milk price for this period is $1.92/cwt. less than the 2011 average for the same months. Of course the high feed costs will squeeze margins in 2012. Anecdotal evidence is the current Pennsylvania basis for corn buyers is very high.

The U.S. dollar is up a bit in recent weeks, as the European situation remains murky. The New Zealand and Australian dollars are essentially the same as last month relative to the greenback, but the Euro is down 4% to $1.304. On the home front, the economic news is slightly better than last month. Congress continues to do nothing about the deficit, or anything else for that matter, and with next year’s presidential election, they don’t seem inclined to make any real progress.

Corn and Soybean Markets
Corn and soybean markets have moved sideways for the last month. The March corn contract is now at $6.01 and January beans are at $11.37. Both are down slightly from a month ago. Soybean meal futures did the same, with January meal futures at $293/ton. The latest USDA estimates for corn and soybean supply and demand mirror their price movements, that is, they show very minor changes from last month.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs fell by $0.32/cow/day in November to $8.63/cow/day, down 3.6% from its October level. The PA all-milk price was down $0.50 at $21.70/cwt. Feed costs were unchanged from last month. Corn prices were up, as were soybean meal prices, while hay was a bit lower. None of these changes were large. 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 a bit lower than 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, perhaps by 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 3.6% from October. The shortage of corn and, in particular, high quality corn is becoming an issue. All feed ingredients face quality issues because of the challenging weather during the 2011 growing season.

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 fell by 1,000 animals. The national dairy herd is 1.0% larger than last year at the same time. Milk production is above the prior year by 1.8%, a narrower increment than last month. Milk production in Pennsylvania and New York, however, is down by 2.0% and 1.3% respectively. Production is still well above a year ago so dairy exports remain very important.

A Longer-Run View – Full-Fat Hard Ice Cream Production
Figures 4 and 5 show annual, full-fat, hard ice-cream production and monthly production for the past few years. The annual data shows that production increased steadily before peaking in 2006, and has since dropped to its 1991 level. The monthly data shows a strong seasonal pattern, which is no surprise. June is the peak in production and December the trough. June production is 66% greater than December. Since ice cream is usually made in advance by a few weeks, the peak production is before the hottest weather and the trough before the coldest weather. Exports peaked at about 4.8% of production in 1994, and have tailed off since, with a revival in 2010. Although more products and more low-fat products, plus dietary issues and the economy certainly, certainly hurt consumption, other factors must be involved. Most of those trends were underway well before 2006. One thing that an economist should always consider is the price and Figure 6 shows a rough estimate of the demand for full-fat hard ice cream. The relationship is a classic demand curve, with lower consumption in response to higher prices. This is not an in-depth study, but the higher prices of the past few years added to the pressure on this part of the ice cream market, which had economic pressure anyway.

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

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