Dairy Outlook: Commodity prices high and unstable

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Market Psychology
Commodity prices in general are high and unstable. Having said that, the markets don’t seem to be quite as jumpy as they were a few months ago. The news around the world continues to be worrisome, with unrest throughout the Middle East, the damaged nuclear reactors in Japan, financial troubles in many countries, including the United States, and extreme weather. Almost every commodity is in short supply, and so minor changes on the demand side can lead to sizeable price changes.

The March all‐milk price was up $2.70/cwt. from February to $22.50/cwt. Both Class III and Class IV prices were up once again, with Class III up $1.83 and Class IV up $1.00. The cheese market is 9 cents below last month, with CME blocks now at $1.63/lb. The butter market is down 12 cents from last month at $2.00/lb. The prices of cheese and butter both fell in March and have stabilized since. Butter inventories again rose in February, but are only at 70% of February inventory levels of the past five years. Cheese stocks fell somewhat, but the cheese price rose, and given the stock levels, the price seems awfully high.

The Class III futures price for April is $16.74/cwt., but averages $17.38 for the rest of 2011, which is better than at this time last month. As is shown in Table 1, the Class III futures rise somewhat from the April values, peaking in September, and then returning to about where they are now. Class IV prices stay about $20.00/cwt. until autumn when they decline somewhat. This is similar to their values last month, but slightly better. Together these values imply a Pennsylvania all‐milk price for 2011 of $20.98, which is $0.41 above last month’s estimate, and $2.70 above the 2010 average price. Nonfat dry milk is down $0.01/lb. in the past month, with the western price at $1.57/lb. Dry whey prices are up 11.3%.

The total value of American dairy imports and exports both rose by a few million dollars in February over January, with an increase in the dairy trade surplus of $1 million. The value of the dollar is down from last month by about 5%, presumably because of the inability of Congress to address the deficit, which implies higher inflation and interest rates. The dollar is up 6.1% against the Australian dollar and 8.4% against the New Zealand dollar, but up only 3.6% against the Euro. The Euro continues to struggle with the economic problems of some member countries, with Portugal finally agreeing to a bail‐out. Spain contends that it will not need a bail‐out, but international bond holders are not convinced. The weakness of the dollar makes U.S. dairy products more competitive in world markets, which helps exports. I expect when the April data becomes available, the weak dollar and weak economy will be reflected in a higher trade surplus in dairy products. China has another milk safety problem and Japan has fears of radioactivity in milk, creating import opportunities in both countries. While these markets are best served by New Zealand and Australia, the diversion of their product to Asia should open opportunities elsewhere for American product.

Corn and Soybean Markets
Corn markets shot up on April 1 with the latest stock reports. The interesting thing is that the monthly stock estimates in the USDA Feed Outlook that came out on April 12 did not change as the authors said the stocks were what they expected. In any case, May corn is up $1.22/bu. since last month to $7.42/bu. Soybeans rose $0.42 to $13.32/bu. for the May contract. Soybean meal is unchanged from last month. Acreage estimates for planting had 4 million more acres of corn and 0.8 million fewer acres of soybeans. Given high prices for almost every crop, double cropping of soybeans where feasible will certainly be up. Very dry weather in the southwest, which is consistent with the La Niña year, will probably not affect corn and beans too much, but will certainly affect southwest dairying adversely.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs rose by $1.77/cow/day in March to $9.38/cow/day, up 23% from its February levels. The PA all‐milk price rose by $2.70/cwt., and feed cost fell by 2 cents/cow/day, so the change was entirely due to the higher milk price. Milk prices for the rest of the year are forecast to be about $1.50/cwt. below March levels, and feed prices will remain high, so an IOFC about 5% above 2010 is a rough estimate for the remainder of 2011. 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 March was up from February.

The funding for USDA’s Dairy Gross Margin program is gone for this year, so producers interested in risk management will need to use other methods until the next Federal fiscal year begins in October.

Milk Production & Cow Numbers
The latest milk production data shows March milk production up 2.4% from a year earlier. The data are shown in figure 2. This increase is faster than the population growth, but not a problem as long as exports continue to increase. Milk cows increased by 17,000 from last year and are 76,000 more than last year. Figure 3 shows the seasonal cow numbers for the past four years. Despite more culling in response to high cattle prices, the milk cow herd is increasing, an indication of the higher ratio of heifers to the herd size. This ratio was 49.7% on January 1, up slightly from a year ago, 2% from 2009 and 4% from 2005. Sexed semen allows this behavior. Figure 4 shows the dramatic change in this ratio.

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

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