Dairy outlook: Class III futures for July are over $20.00/cwt

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Market Psychology
Commodity prices have been strong, although the grains fell at the end of last week. Dairy however, was the exception. Cheese blocks have risen for 16 straight days, and are now at $2.11/lb, compared to $1.62 at this time last month. Class III futures for July are over $20.00/cwt. (see Table 1). Butter prices are at $2.125/lb, up 14 cents from last month. Whey powder and nonfat dry milk are both up, by 1.6% and 3.1% respectively. The strength in the butter market is a reflection of stocks, which will be discussed later in the report. Cheese inventories are adequate, so the price increases are due to other factors. In part, this must be a reflection of the strength in feed prices, as corn and soybean prices continue to be very high, and the Corn Belt continues to be in the news daily with floods and other adverse weather. Certainly the weak dollar will continue to aid exports.

The May all‐milk price was down 10 cents from April to $21.40/cwt. The May Class III price fell to $16.52/cwt, from $16.87 last month. Class IV prices were up by $0.51 to $20.29. The Class III futures price averages $18.73 for the rest of 2011, with prices above this value through September and lower prices at the end of the year. Class IV futures prices average $20.15/cwt. for the remainder of 2011. Together these values imply a Pennsylvania all‐milk price for the rest of 2011 of $22.29. For the entire year, the forecast average is $21.71, which is $3.43 above the 2010 average price.

The value of the dollar is still very low, about 2% lower than this time last month. The Australian dollar fell 0.6% against the greenback, and the Euro and New Zealand dollar are up 1.7% and 2.8% respectively.

Greece is now teetering on the edge of default for its debt, which would undermine the confidence in the Euro. Given the public’s response to the needed austerity measures, many analysts think the Greek government has little choice but to default. The low interest rates in the United States and the inability of Congress to address the deficit are helping keep the dollar weak. I expect dairy exports to be strong and dairy imports to be weak for the remainder of 2011, which will help keep milk prices high.

Corn and Soybean Markets
Corn markets rose sharply in the May, before steadying at about $7.60 for the July 2011 contract. It dropped 32 cents Monday and now sits at $7.32. With planting delays, floods, and various other weather related news, the market is edgy. Aside from Ohio, the corn crop is mostly planted. Corn and wheat are at the same price now on the Chicago Mercantile Exchange, which means wheat is a viable substitute in feed rations. If these prices continue, it may lessen the impending shortages until the corn harvest begins. Soybeans are at $13.83/bu. for the July contract, up 57 cents form last month. Soybean meal is up $16/ton from last month at $359 for the July contract.

With all of the wet weather in the northeastern United States, the hay harvest has been affected. As with any impediment to home grown feed production, this means farmers will have to replace the foregone production with purchases, which will undermine the gains from the high milk prices.

Income over feed costs (IOFC)
Penn State’s measure of income over feed costs rose by $0.08/cow/day in May to $8.66/cow/day, up 0.9% from its April levels. Although the PA all‐milk price was down $0.10 at $21.40/cwt., feed cost fell by 28 cents/cow/day, causing the increase in IOFC. The lower feed costs were due to a $10/ton drop in USDA’s estimate of Pennsylvania alfalfa hay prices and a 5 cent/bu. drop in corn prices. Milk prices for the rest of the year are forecast to be about $0.90/cwt. above May levels, and feed prices will remain high. 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. Figure 1 shows that income over feed cost is at its 2007 level, although it is unlikely that the remainder of 2011 will match 2007 values.

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 May was up slightly from April.

A Longer Run View: Butter Stocks versus Price
Figure 2 shows the last five years of monthly butter inventories compared to the butter price. In general, when inventories are low, prices are high, because if there is a shortage for any reason, with low inventories there are no buffer stocks. This relationship holds for almost any storable commodity and inventories are closely watched in corn and wheat markets, among with many other products. The April values are marked in red. The other dots around it are mostly this year. The important thing is that April is usually an inventory accumulation month, but this year it was not. If we are using all of our production in the current month during the spring, the inventories we need for the fall months, when milk production is less will not be there. This means that the current butter prices over $2.00/lb. seem to be justified.

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

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