Penn State University’s measure of income over feed costs (IOFC) fell slightly in May, but remains very high, according to the latest Dairy Outlook report from economist Jim Dunn. At $11.64/cow/day, the May IOFC is down 16¢/day (-1.3%) from April, with a decline in feed prices offset by a milk price decline.

IOFC reflects daily gross milk income less feed costs for an average cow producing 65 lbs. of milk per day. The average cost to feed a cow producing 65 lbs. of milk per day was $5.58/day, down 4¢ (0.7%) from April, with soybean meal prices lower, but corn and alfalfa hay prices holding steady.

The May 2014 Pennsylvania all-milk price of $26.50/cwt., down 30¢ from April’s record high.

Measured another way, feed costs per hundredweight of milk produced averaged $8.59/cwt. in May, down 6¢ from April. With the lower milk price, the milk margin over feed costs was $17.91/cwt., down 24¢/cwt. from April 2014, but up $7.50/cwt. from May 2013.

Dunn’s forecast of the average 2014 Pennsylvania all-milk price is $25.11/cwt., which would be up $3.63 (16.9%) from 2013’s estimated price of $21.48/cwt.

To read Dunn’s latest Dairy Outlook report, click here.

Corn prices have fallen 12% since last month, ending at $4.50/bu. for the July 2014 contract. Growing conditions are favorable in the Midwest. Other northern hemisphere producers are also having good weather. Soybean prices are down 3% from last month, also a reflection of the good weather in the Corn Belt. Soybean meal is down 7.8% from last month.

The May Pennsylvania all-milk price was 30¢ lower than April at $26.50/cwt., although still a near-record price level. The forecast all-milk prices for the rest of 2014 average $24.37/cwt., or $2.50/cwt. above the same period of 2013. The decreasing prices for the remainder of 2014 reflect the expectation that milk production will grow by more than it has so far this year in response to better margins, especially in the eastern half of the country.

According to Dunn, the April Class III price will likely be the highest for the year, as cheese markets are expected to fall as the year progresses. The May Class III price was $1.74 lower than April, at $22.57/cwt. The latest Class III futures price for June is $21.34/cwt. Average Class III futures prices for the remaining seven months of 2014 are $2.60 above 2013 prices for the same months, at $20.88/cwt..

The May Class IV price was down $0.69/cwt. from April, at $22.65/cwt. The prices for Class IV futures average $21.85/cwt. for the rest of 2014, also up from last month. Like Class III, Class IV futures prices are expected to decline through the rest of 2014, although not as much as Class III.


Market psychology

The U.S. dollar is higher in the past month against the Euro, and about the same versus the Australian and New Zealand dollars, Dunn wrote in his monthly dairy outlook report. The Euro zone continues to have a variety of challenges as it tries to manage the disparate economies of the member states, as well as the problems with Russia’s behavior in Ukraine and elsewhere, which affects its natural gas supply and other things.

The Wall Street Journal Online recently reported that, “China’s food-safety regulators pulled production permits from more than a third of the country’s infant-formula makers, pushing for consolidation and greater control in an industry that has suffered quality scandals.” The same article noted that foreign brands have a 55% share of the formula Chinese market.


Poland’s dairy industry

Dunn just returned from two weeks in Poland. Poland was admitted to the European Union (EU) in 2004. At that time, its dairy industry included large numbers of backyard cows, with most rural residents having one or two cows.

The EU dairy regulations required bulk tanks and since Poland’s EU entry most of these backyard cows have disappeared. The average herd size in still small by U.S. standards, but the industry is very different than a decade ago. A similar consolidation happened in the processing industry, with many small milk plants disappearing and considerable investment from western European countries.

With EU dairy quotas ending in 2015, Poland could see considerable outside investment in dairy production by farmers from Britain and the Netherlands that seek access to the lower labor and land costs and the opportunity to expand without the quotas, Dunn said.  The end of quotas could change the EU’s dairy surplus as price supports are reduced and less intervention to support milk prices should reduce its subsidized dairy product exports.