Jim Dunn, Penn State University dairy economist
Jim Dunn, Penn State University dairy economist

Pennsylvania dairy farmers saw milk income over feeds costs (IOFC) take a big dip in December, shrinking to the lowest level in about 16 months, according to the monthly Dairy Outlook report from Jim Dunn, Penn State University dairy economist.

Penn State’s measure of IOFC fell by 19% in December, with higher feed costs combining with lower milk prices compared to November. Pennsylvania hay, corn and soybean meal prices were all higher than the month before, pushing total feed costs up 7% (33¢/day) from November, to their highest level since June.

Meanwhile, Pennsylvania’s all milk price declined $2.70 from November, to $21.60/cwt., the lowest since August 2013.

IOFC reflects daily gross milk income less feed costs for an average cow producing 65 lbs. of milk per day. December’s value for IOFC of $8.80/cow/day was the narrowest margin since August 2013.

 

Measured another way, feed costs per hundredweight of milk produced averaged $8.06/cwt. in December, up 51¢ from November. With the lower milk price, the milk margin over feed costs was $13.54/cwt., down $3.21/cwt. from November 2014, and also the lowest since August 2013.

Dunn’s forecast of the average 2014 Pennsylvania all-milk price is $25.56/cwt., which would be up $4.08 (19.0%) from 2013’s estimated price of $21.48/cwt. Based on 2015 projections, however, the Pennsylvania all-milk price will average $18.77/cwt., down $6.79 (-26.6%) from 2014.

 

There are several factors weighing on the lower milk prices – and tighter margins – Dunn noted.

• On the demand side, the U.S. Dollar is up against the Euro (0.6%) and the Australian dollars in the past month, with the New Zealand dollar up slightly. The dollar has risen 29% against the Aussie dollar in two years, a very large change in exchange rates. Australia is struggling with weakness in the Chinese economy. According to the Wall Street Journal, the dollar has risen by 13% against the Euro and 15% against the Yen since the end of June. These are very large changes for exchange rates, and since the U.S. is a major exporter of most agricultural commodities, this will adversely affect most farm prices as U.S. products become less affordable than its competitors.

• On the supply side, November U.S. milk production was up 3.4% from the year earlier, another sizeable monthly increase after many months of minimal growth. This is bearish, although the increase was expected. Once again, the growth in milk production was in milk per cow rather than cow numbers. The national dairy herd this November is only 0.89% greater than in November 2013. .

• Although butter prices weakened in December, most of the product prices have been steady at the recent lower levels. Butter prices have dropped by 22% since last month, from $1.985 to $1.54/lb. This drop happened suddenly in mid-December and the butter price has been steady since. Over the same period, block cheese prices have moved around, but are only 1¢ lower than a month ago, at $1.57/lb. The skim-milk powder price fell by 8% (8.5¢/lb.) but has recovered somewhat lately. The dry whey price is down 3% since last month.

To read Dunn’s complete Dairy Outlook report, click here.