Market Psychology
The November all-milk price was the second highest of 2010, trailing only October. The Class III and Class IV prices were down, especially Class III, but the pricing system has the all-milk price trail market conditions. The PA all-milk price fell $0.40/cwt. to $20.10/cwt. The Class III price fell by $1.50, and the Class IV price fell by $0.47. Commodity markets continue to be unstable. The cheese market is 8 cents below last month, with CME blocks now at $1.32/lb. The butter market is 35 cents below last month at $1.62/lb. Butter prices fell steadily in the second half of November, but have risen somewhat since. Despite low butter inventories in September, the prices were still high for that level of inventories, and so the price dropped to a level more consistent with the stocks. Unlike butter prices, cheese prices rose in the second half of November, but fell sharply in early December. The inventories of cheese shocked the market once again. The weak economy is having a negative effect on cheese consumption, and of course, with the holidays and schools on break, more cheese will be produced in coming weeks. The futures market reflects this, as Class III futures are $13.78/cwt for December, down $1.55 from November levels. The Class III futures prices for 2011 average $14.63/cwt. These futures prices are slightly higher than last month at this time. Table 1 shows these prices, the Class III and Class IV futures prices as of December 16, and the implied PA all-milk price based on these futures market prices. The predicted average all-milk price for all of 2011 is $17.97, down 18 cents from the 2010 average. This predicted average for 2011 is up from last month’s values. Nonfat dry milk is up 3.25 cents in the past month, with the western price at $1.22/lb. Dry whey prices are up less that 1%.

The U.S. continues to be a net exporter of dairy products. The dollar has strengthened in the last month, in part because the Federal Reserve’s efforts to lower interest rates are not working. The Australian dollar is at $0.9875 US, down slightly from November. The New Zealand dollar is down 5.2% to $0.7376 US. The Euro is down 2.8% to $1.326.

Corn and Soybean Markets
Once again, the latest crop report shook up the commodity markets. Corn prices fell from over $6.00 for the March 2011 contract last month down to $5.30 and back to $5.96. The soybean market took a similar roller coaster ride and is now about where it was last month,  with January 2011 beans now at $12.99. Soybean meal prices behaved similarly, following beans. Overall the cost of feed, for those who must purchase feed, will be high in 2011, so the projected 2011 milk prices overstate the dairy outlook.

Income over feed costs
Penn State’s measure of income over feed costs rose $0.12/cow/day in November or 1.3% from its October levels. The PA all-milk price fell by $0.40/cwt., but feed cost fell by 39 cents/cow/day, partially offsetting some of the increase in milk price. This feed price drop is counterintuitive, and reflects the fall in commodity prices during the month. In fact, I expect that income over feed cost changed little during November. 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 November was down from October. Similarly I believe that these values overstate the gains in net income for the month. Without question December will be worse and January and February will probably be worse than December. 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.

Dairy Trade
The last figure shows the value of monthly U.S. dairy imports and exports over the past 11 years. It clearly shows that the dairy trade balance has shifted significantly. Monthly exports are now near the 2008 highs, and since current prices are lower than in 2008, the milk-equivalent exports are greater than 2008. The net trade surplus is greater than in 2008 because imports are lower this year. The relative strength of the world economy, especially the developing world, compared to ours explains part of this. Also the very hot weather in Europe this summer has increased the market for U.S. butter exports. I continue to believe that the dairy industry must export to prosper and so I view the recent trade surplus to be a good sign. Of course, our competitors will not surrender their markets without a fight, but I am optimistic about the future of dairy exports.

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