Market Psychology

The January all‐milk price was down $1.50/cwt. from December to $17.80/cwt. The Class III and Class IV prices moved in opposite directions, with Class III down $0.38 and Class IV up $1.39. As was seen in December, the pricing system means that the all‐milk price trails market conditions. Commodity markets in general are unstable. The cheese market is 41 cents above last month, with CME blocks now at $1.94/lb. The butter market is down 4 cents from last month at $2.06/lb. Butter prices have been pretty steady for the past six weeks, although holders of inventory are nervous. Butter inventories rose somewhat in December, but were at the lowest level in five years, except for November. Cheese prices are $0.42/lb. higher than this time last month. The butter‐powder market is pulling milk out of cheese production, allowing cheese prices to catch up.

The futures market reflects this, as Class III futures for February are $16.96/cwt., but over $18.00 for March through May, and over $17.00 through October. The Class III futures prices for 2011 average $17.22/cwt., or $2.81/cwt. above 2010 (and $1.60 over this time last month). Class IV futures for 2011 average $19.02/cwt., $3.94 over the 2010 values. The higher Class IV prices are reflective of the strength in the butter market. These prices may be seen in Table 1, along with the implied PA all‐milk price based on these futures market prices. The predicted average all-milk price for all of 2011 is $20.98, up $2.67/cwt. from the 2010 average. This predicted average for 2011 is up by $1.50 from last month’s values. Nonfat dry milk is up $0.27/lb. in the past month, with the western price at $1.49/lb. Dry whey prices are up 4.7%.

The U.S. continues to be a net exporter of dairy products, and the trade surplus grew in December. The dollar has been largely unchanged in the last month. The Australian dollar is at $0.9997US, up very slightly from January. The New Zealand dollar is down 1.9% to $0.7537US. The Euro is up slightly to $1.351. Butter exports in 2010 were almost double those of 2009, at nearly 57,000 metric tons.

Corn and Soybean Markets

Once again, the latest USDA feed report shook up the commodity markets. The final estimates of ending stocks on August 31, 2011 for corn are at very low levels. In particular, the estimated ending corn stocks are 18.3 day’s supply, the lowest level since the 1930s. In response corn prices rose to $6.91 for the March 2011 contract, up from $6.49 last month. The soybean market fell by $0.31/bu to $13.68 for the March contract. Soybean meal prices behaved similarly, falling $10/ton since last month. The cost of purchased feed for 2011 will be high, at least until the fall harvest, and December 2011 corn is $5.92/bu., so the markets expect high prices for the next crop year as well. Certainly with such small inventories carried into the next crop year, and expected usage more than annual production, any bad weather will mean high crop prices for the 2011 crops.

In addition to the market fundamentals, speculation is playing an increased role in commodity markets. In the early stages of an economic recovery, commodity prices usually rise, and more non‐agricultural speculators are long in agricultural futures, driving prices up to some degree.

Income over feed costs

Penn State’s measure of income over feed costs fell by $1.26/cow/day in January to $6.65/cow/day, or 15.9% from its December levels. The PA all‐milk price fell by $1.50/cwt., but feed cost rose by 28 cents/cow/day, further adding to the impact of the decrease in milk price. This feed price increase will continue in February, since corn and prices have risen since January. However, the milk price will be up in February by more, so the February IOFC will be higher, probably by more than it dropped in January. 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.

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 January was down from December. Without question February will be better than January, and if milk prices rise as the market expects, the milk margin will be even higher in the Spring. The price forecasts in Table 1 should more than offset higher feed prices.

The USDA’s Risk Management Agency’s Dairy Gross Margin program has its monthly window of availability February 25‐26. This allows a dairy producer to protect a version of our milk margin measure from adverse price changes. Given the outlook for milk prices, some form of risk management in 2011 should be seriously considered.


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