Dairy Outlook: May

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Market Psychology
April milk prices were lower than March, with the PA all-milk price down $1.10 /cwt. The Class IV price rose by $0.81, while the Class III price rose by $0.14. The Class I price is determined earlier in the Month and does not reflect the recent strength in the markets, which hurt the all milk price. The cheese market, which had dropped sharply in mid-April, has risen since, not by a lot, but steadily. CME blocks are now at $1.4075. More importantly, the Class III futures are around $15.00/cwt for July through December 2010. Table 1 has these prices, the Class III and Class IV futures prices as of May 12, and the implied PA all-milk price based on these futures market prices. The predicted average all-milk price for all of 2010 is $0.33 higher than last month’s values. The next two months are forecast to be $17.10 and $17.60, with the second half of 2010 being above $18.00, with an average of $17.90 for the year overall.

As mentioned above, the cheese market has risen lately. Cheese plants are going full tilt right now, especially in the east. The butter market has also risen from $1.56/lb to $1.61. Butter is competitive in world markets right now, but production is off in the U.S. and this is usually a time when butter is stockpiled for later in the year. Buttermilk powder and anhydrous milk fat are hard to find as well. The west, which has many of the butter plants, has had more of a decrease in milk production, which is reflected in butter production. Non-fat dry milk prices have risen $0.06/lb. Whey powder has been flat. This stability in product prices has clearly helped the psyche of the dairy markets, compared to the volatility in recent months. The strength in the futures undoubtedly reflects this confidence.

The dollar‘s exchange rate with the Euro higher than a month ago. The efforts to prop up Greece are decidedly shaky, and Spain, Portugal, and Ireland are in trouble as well. Both the Australian and New Zealand dollars continue to strengthen versus the U.S. dollar, which helps our dairy products in world markets.

Corn and Soybean Markets
Corn is trading higher than this time last month, rising about 20 cents over the period. The latest USDA estimates expect a record crop for 2010, but usage that will consume almost all of it. In contrast, soybeans fell about $0.50/bu. in the past month and are near the middle of the trading range for the past few months. USDA’s prospective plantings report shows a record number of soybean acres for 2010. The estimated soybean crops in Brazil and Argentina are strong. Soybean meal is down 14/ton from this time last month, driven by strong export demand, especially to Southeast Asia. However, USDA does not expect this strong export demand to continue into the next crop year.

Income over feed costs
Penn State’s measure of income over feed costs fell $0.29/cow/day in April or 4.0% from its March levels. This is considerably less than the drop in the milk price of 6.4%, because the daily feed cost dropped by 10.9%. This decrease in feed costs is the result of a sharp drop in alfalfa hay and corn prices in Pennsylvania relative to national levels. Whether this is an accurate reflection of markets or some anomaly that USDA will amend next month I don’t know. It is unusual for Pennsylvania prices to differ from national markets by so much this time of the year, so I suspect the latter. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk. The April value is slightly less than the five year average and near the ten-year average value. Figure 1 and Table 2 showing the monthly data are appended.

The allocation of the revenue per hundred pounds of milk is shown in Table 3. This value, 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 April was down from the previous five months. Milk prices should be higher in May, which will help revenues and income over feed cost. As of now it looks like April milk prices will be the lowest of the year.

Milk Production and Cow Numbers
I have a trip to Ukraine and so I am doing my outlook early and do not have the latest milk production and cow numbers data. I will discuss this again in June.








Foreign Exchange Rates
Figure 2 shows the relative exchange rates of the currency of various competitors and trading partners compared to the U.S. dollar. Essentially this index is the cost of something that cost one dollar in January 2006 to someone from another country if they have to convert their own money to dollars to buy the item. As the graph shows the weak dollar in 2007 and early 2008 meant that U.S. products were cheaper to foreign customers relative to a January 2006. However in early 2009, the dollar strengthened and our products became much more expensive. Since the dollar has fallen compared to these other currencies, our products now appear to be on sale once again. This is important for dairy because New Zealand, Australia, and the European Union are the major exporters of dairy products. In 2007, our dairy products were relatively affordable and our exports of dairy products rose sharply. In late 2008 and early 2009, our dairy products were much less competitive and our exports plummeted. Since then the dollar has lost value compared to these currencies and our exports have done better. Most recently, the dollar has become weaker compared to the New Zealand, Canadian, and Australian dollars, but stronger compared to the Euro. The considerable financial problems in Greece, Spain, Portugal, and perhaps Ireland have undermined the Euro. Historically exports haven’t been very important to the U.S. dairy industry. However, in the future I believe they will be much more important. The value of the dollar will be a big factor in the competitiveness of U.S. dairy products internationally.




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