Dairy Outlook: All-Milk Price Falls, Cheese & Butter Higher

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Market Psychology
The December all-milk price was down $0.80/cwt. from November to $19.30/cwt. However, the Class III and Class IV prices were down more, with Class III down $1.61 and Class IV down $1.65. As was seen in November, the pricing system means that the all-milk price trails market conditions. Commodity markets continue to be unstable. The cheese market is 19 cents above last month, with CME blocks now at $1.51/lb. The butter market is 44 cents above last month at $2.10/lb. Butter prices rose sharply with the new year. Butter inventories fell in November, as usual, but were at the lowest level in five years. Butter exports continue to be strong, so the low inventories are bullish news. Like butter, cheese prices rose sharply in the since January 1. The cheese market is following the butter market.

The futures market reflects this, as Class III futures are $13.50/cwt. for January, but over $15.00 for the remainder of 2011. The Class III futures prices for 2011 average $15.62/cwt., or $1.21/cwt. above 2010. Class IV futures for 2011 average $17.49, $2.42 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 $19.48, up $1.21/cwt. from the 2010 average. This predicted average for 2011 is up by $1.40 from last month’s values. Nonfat dry milk is unchanged in the past month, with the western price at $1.22/lb. Dry whey prices are up less than 3%.

Although the U.S. continues to be a net exporter of dairy products, the trade surplus shrunk in November, which is typical. Imports of high value cheeses for the holidays are a factor here. The dollar weakened in the last month. The Australian dollar is at $0.9977 US, up slightly from December. The New Zealand dollar is up 4.2% to $0.7684 US. The Euro is up slightly to $1.335. World conditions should support strong exports in 2011.

Corn and Soybean Markets
Once again, the latest crop report shook up the commodity markets. The final estimates of the 2010 corn and soybean crops were reduced further, with estimated ending stocks on August 31, 2011 at very low levels for both. In particular, the estimated ending corn stocks are 22.6 day’s supply, the lowest level since the 1995-96 crop year. In response corn prices rose to $6.49 for the March 2011 contract, up from $5.96 last month. The soybean market had a similar jump, with January 2011 beans now at $14.06. Soybean meal prices behaved similarly, rising $29/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 $5.71/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 so great, any bad weather will mean high crop prices for the 2011 crops.

Income over feed costs

Penn State’s measure of income over feed costs fell by $0.77/cow/day in December or 8.9% from its November levels. The PA all-milk price fell by $0.80/cwt., but feed cost rose by 26 cents/cow/day, further adding to the impact of the decrease in milk price. This feed price rise will be continued in January, since corn and soybean prices have risen sharply since December. Since the milk price will be down in January as well, the January IOFC will be down. 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 December was down from November. Without question January will be worse than December, although it looks like the milk margin will rise after that. The price forecasts in Table 1 show why. The higher feed prices will mean higher expenditures for purchased feed in 2011, which is especially important in much of Pennsylvania, given the lower yields for feed crops.

The USDA’s Risk Management Agency’s Dairy Gross Margin program has its monthly window of availability January 28-29. This allows a dairy producer to protect a version of our milk margin measure from adverse price changes.

Milk Production
The December milk production report had production 2.5% above December of 2009, a smaller decrease than in the previous three months. Cow numbers were up 54,000 head from last December, compared to 29,000 more in November. Graphs showing this data compared year to year are shown below. I don’t view either number as unusual, and given the market conditions, are not a sign of over production.

Some Perspective on 2010
In retrospect, 2010 was not a bad year for milk prices. Table 4 shows the milk price, feed cost/cwt., and the milk margin for the last five years. The average Pennsylvania all milk price was 67 cents above the five-year average, the feed cost was 26 cents below the five-year average, and the milk margin was 93 cents above. Although 2008 was considered to be a good year at the time, when feed cost is evaluated at market prices, 2010 was better. The past five years have had two bad years, one good year, and two years slightly about average. I have this same data back to 2000, and the period 2000-05 was worse than the past five years. Of course, the prices of things that must be purchased with the milk margin have not remained the same, and some (fuel, in particular) have seen considerable inflation. Furthermore, 2009 was such a bad year that many dairy producers added a lot of debt, making them especially vulnerable in 2010. Milk prices in 2011 are looking good, as do exports. Feed prices will undermine this for those that buy feed.












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


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