Market Psychology
The February Pennsylvania all‐milk price was up $0.90/cwt. from January to $19.80/cwt. Both Class III and Class IV prices moved up sharply, with Class III up $3.52 and Class IV up $1.98. Commodity markets in general are very unstable. The prices of many commodities have gone down from the recent highs, partly in response to conditions in Japan, which will have consequences worldwide. The cheese market is 22 cents below last month, with CME blocks now at $1.72/lb. The butter market is up 5 cents from last month at $2.12/lb. Butter prices dropped 5 cents in the second half of February, but rose 10 cents on March 2, to where they sit now. Butter inventories rose 37 mil. lbs. in January over December, but are still at the lowest level for January since 2005. Cheese prices had increased steadily, before falling sharply each day this week, following commodity prices in general.

Class III futures for March are $19.58/cwt., but average only $16.48 for the rest of 2011, reflecting the lower cheese prices. Class IV futures prices are higher, averaging $19.20 for the remainder of 2011, because of the stronger butter market. Since the Class I price is based on the higher of Class III and IV, the predicted average all‐milk price for all of 2011 is $20.57, down $0.41/cwt. from last month’s estimate, but still $2.29 above the 2010 average. Nonfat dry milk is up $0.09/lb. in the past month, with the western price at $1.58/lb. Dry whey prices are up 2.6%.

The total value of American dairy imports fell in January over December’s imports , which is typical, and the value of exports was about the same as December, which is also typical. However, the value of exports is $100 million more than a year ago, making the trade surplus in dairy $160 million. The value of the dollar is up about 1% against the Australian dollar and 2.5% against the New Zealand dollar, but down 3.3% against the Euro. The Euro continues to struggle with economic problems of some member countries, the latest being Spain.

Corn and Soybean Markets
Japan is the largest customer for U.S. corn exports, and the disruptions there have caused corn prices to plummet. May corn has dropped $1.15/bu. since early March to $6.25/bu. Soybeans dropped a comparable amount to $12.96/bu. for the May contract. Soybean meal prices, which had risen in late February, fell with beans to $347/ton, down $23 from this time last month. USDA has reduced world production estimates of feed grains, which should increase prices, but the impact of the Japanese disasters, continued problems in the Middle East, and general economic uncertainty have certainly eroded the bullish sentiment in commodity markets we saw a month ago.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs rose by $0.18/cow/day in February to $7.54/cow/day, or 2.5% above its January levels. The PA all‐milk price rose by $0.90/cwt., but feed cost rose by $0.40/cow/day, offsetting the higher milk price somewhat. The feed price value will be lower for March, while the milk price will be much higher, so IOFC will increase in March, to values that may be the highest for 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 which show 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 February was up from January. The price forecasts in Table 1 should more than offset higher feed prices, especially if the Class IV price can stay up.

Often USDA revises the data a month after the original estimate. The data used for income over feed cost were revised considerably for the second half of 2010, meaning the values in Tables 2 and 3 are unusually different from last month’s estimate.

The USDA’s Risk Management Agency’s Dairy Gross Margin program has its monthly window of availability March 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 and feed prices, some form of risk management in 2011 should be seriously considered.

Dairy Trade
As mentioned earlier, the dairy trade surplus is up. Figure 2 shows the monthly dollar value of exports and imports since 2000. It is apparent that exports have changed significantly in the past four years, while imports have leveled off, or perhaps decreased. Of course, prices have changed over this period and this data is not adjusted for changes in prices. Price changes should change the value of both imports and exports similarly, but this is not seen. The improved dairy trade surplus is the result of several factors, including more favorable exchange rates, weather at home and abroad, and more dairy trade overall. Regardless of the reason, increased dairy exports help U.S. dairy prices and the industry.


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