Dairy Outlook: April's income over feed costs falls 3.6%

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Market Psychology
Commodity prices tumbled last week, but dairy did not follow until May 11. For markets in general, the speculators with no underlying agricultural interest apparently became apprehensive.

The April all‐milk price was unchanged from March at $22.00/cwt. The April Class III price fell to $16.87/cwt, from $19.40 last month. Class IV prices were up by $0.37 to $19.78. The product prices are all within a few cents per pound of their values last month. CME blocks are now at $1.62/lb. The butter market is down 2 cents to $1.98/lb. Butter inventories again rose in March, but are still at 70% of average March inventory levels of the past five years. March cheese stocks fell slightly from February, and the cheese price fell a bit, although the price is still high, given the stocks.

The Class III futures price for April is $16.87/cwt., but averages $17.11 for the rest of 2011, which is a bit worse than at this time last month. As is shown in Table 1, the Class III futures prices average $17.22 from June to December. Class IV futures prices average $19.84/cwt. for the remainder of 2011. This is similar to the values last month, but lower. Together these values imply a Pennsylvania all‐milk price for 2011 of $21.13, which is $0.15 above last month’s estimate, and $2.85 above the 2010 average price. Nonfat dry milk is up $0.03/lb. in the past month, with the western price at $1.60/lb. Dry whey prices are up 9%.

The value of the dollar is still very low, about the same as last month. The Australian dollar rose 2.7% against the greenback, and has now gained 21% since August 2010. The Euro and New Zealand dollar are down slightly from a month ago. The Euro continues to struggle with the economic problems of some member countries, Portugal and Greece being the focus now. Spain and Italy are also weak. The low interest rates in the United States are helping keep the dollar weak. March exports of cheese were a record high, and international demand should remain strong.

Corn and Soybean Markets
Corn markets have fallen sharply in the past two weeks, with the May contract now at $6.78/bu. down from $7.42 a month ago. After a month of very wet weather in the Corn Belt, a week of dry weather has allowed planting to make considerable progress. Of course, lack of soil moisture will not be an issue for some time. The USDA has just projected a record corn crop for 2011, which should augment the very low ending inventories from the 2010 crop. Having said that, until the new crop is available, corn may become very scarce.

Soybeans fell $0.06 to $13.26/bu. for the May contract. Soybean meal is essentially unchanged from last month. The differences in corn and soybean forecasts are mostly because of changes in acreage, as farmers increase corn acreage and reduce soybean acres.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs fell by $0.33/cow/day in April to $8.77/cow/day, down 3.6% from its March levels. Although the PA all‐milk price was unchanged at $22.00/cwt., feed cost rose by 33 cents/cow/day, causing the reduction in IOFC. Milk prices for the rest of the year are forecast to be about $0.75/cwt. below April levels, and feed prices will remain high, a rough estimate for the remainder of the year is IOFC about 5% above 2010. 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 April was down somewhat from March, but still at the highest value for April for the 11 years that I have records.

A Longer Run View: Ethanol and the Corn Economy
The use of the American corn crop has changed dramatically in the last decade. As a result, even very large crops can be accompanied by high prices. Certainly that is true this year. Table 4, seen below, shows the change in corn usage for selected years. As recently as 2002, ethanol represented only 10% of corn usage. The latest estimate is that ethanol will use 37% of the 2010 crop. Although, distillers grains, whether dried or wet are an animal feed, they do not have the energy that corn does, since the energy was extracted in the ethanol. One important consideration is that corn users have very few substitutes. Corn is about 95% of U.S. feed grain production, and so animal producers must use corn. Likewise the food uses, such as high‐fructose corn syrup, corn flakes, starch, and liquor have few substitutes and usually represent a minor part of the cost of the final product (Pepsi‐Cola, for example). Exports are also used mainly for food and feed. Only ethanol for fuel has a ready substitute, gasoline. In years of a small crop, which 2010 was when compared to usage, the price will rise rapidly. The customers have little choice but to buy corn, and ethanol producers have the protection of a government imperative.

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

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