The underlying message contained in USDA’s Livestock, Dairy & Poultry Outlook report mirrored the previous week’s World Ag Supply & Demand Estimates report: September and October 2014 provided some of the best economic conditions dairy farmers have seen for a long time, but things are changing.
First, the highlights:
• The October 2014 all milk price of $25.30/cwt. was second only to the record-high September 2014 price of $25.70/cwt.
• The cost of the October USDA benchmark 16% dairy feed ration was the lowest since November 2010.
• The milk-feed price ratio of 3.07 for October 2014 was at its highest level since October 2007.
Multiple factors are already painting a somewhat different financial landscape in the months and year ahead. While the numbers are still strong enough to encourage dairy expansion, income margins could look substantially different than much of 2014.
• U.S. milk production continued to climb in the third quarter of 2014
USDA’s next Milk Production report will be released Nov. 19. Looking back at the year-to-date, U.S. milk production during the third quarter of 2014 totaled 51.1 billion lbs., up 3.5% from the third quarter or 2013. Milk cow numbers for the quarter were lower than expected, while milk per cow for the quarter was higher than expected. Of the 23 selected states reported monthly by USDA National Agricultural Statistics Service, all had September year-over-year gains in milk production with the exception of Illinois, which had a decline of 0.7%. Despite persistent drought conditions, milk production for California continues to grow, with September milk production 2.9% above last year.
Compared to a month ago:
• 2014 milk production and marketings were projected 100 million lbs. higher, at 206.2 billion lbs. and 205.2 billion lbs., respectively. If realized, 2014 production and marketings would be up about 2.5% from 2013.
• 2015 production and marketings were projected 500 million lbs. lower than the previous month’s forecast, at 212.3 billion lbs. and 211.3 billion lbs., respectively. If realized, 2015 production and marketings would be up about 3.0% from 2014.
• Product, milk prices dropping
With the fall in the butter price throughout October, the butter price forecast for the fourth quarter of 2014 is $2.110 to $2.170/lb. The forecast for the fourth-quarter cheese price has been raised to $2.125-$2.155/lb., the nonfat dry milk price forecast has been raised to $1.405-$1.435/lb., and the fourth-quarter dry whey price is lowered to 62.0-64.0¢/lb.
The Class III price for the quarter is raised to $21.90-$22.20/cwt. With the lower butter price, the Class IV price for the fourth quarter is lowered to $18.90-$19.30/cwt., and the range for the all-milk price forecast is reduced to $23.55-$23.85/cwt. For the 2014 annual projection, the all-milk price is $24.15-$24.25/cwt.
With lower export forecasts, 2015 prices for milk and dairy products have been lowered from last month’s forecast. Of the major dairy products, the nonfat dry milk price is most dependent upon the export market. The nonfat dry milk price projection has been reduced through the entire year, with an annual forecast of $1.410-$1.480 per pound. Cheese and butter prices have been reduced for the first half of the year, resulting in annual projections of $1.690-$1.780/lb. and $1.660-$1.780/lb., respectively. The dry whey price forecast is unchanged from last month at 56.0-59.0¢/lb. The Class III price forecast is lowered to $17.15-$18.05/cwt., and the Class IV price is lowered to $17.05-$18.05/cwt. Next year’s all milk price forecast is lowered to $18.85-$19.75/cwt.
Dairy Herd Management compares the quarterly USDA milk price projections with current Chicago Mercantile Exchange futures prices (see Table). it should be noted USDA projections were made on or before Nov. 10, before last week's weakness on the CME.
• Low dairy prices abroad and recent impacts to U.S. dairy trade
Although U.S. dairy product prices have declined, they are higher than export prices of competitors. For example, for the week ending Nov. 1, the AMS butter price was $1.99/lb., while the Oceania export price ranged from $1.10-$1.45/lb. for the two weeks ending Nov. 7. Several factors are contributing to relatively low dairy prices abroad. New Zealand and the European Union (EU) have both experienced robust growth in milk production. For the January through August period, New Zealand experienced 14% year-over-year growth, while the growth for the EU was 5% over the same period (Dairy Companies Association of New Zealand and Eurostat). A reduction in dairy import demand from China has played a role as China’s imports of milk powder have fallen from a peak of 159,034 metric tons in January 2014 to 25,518 metric tons in September. EU export prices have declined since Russia announced a one-year ban on agricultural product imports from several countries in August.
The large differences between U.S. domestic prices and foreign export prices have influenced the U.S. dairy trade. On a milk-fat milk-equivalent basis, exports for the third quarter were 23.1% less year-over year. On a skim-solids basis, the year-over-year decrease was 10.1%. Notably, from August to September, monthly exports fell 29.4% for nonfat dry milk and skim milk powder.
While exports have decreased, year-over-year imports have increased. Third-quarter imports on a milk-fat basis were 1.1 billion lbs., about 0.3 billion lbs. higher on a year-over year basis but slightly lower than projected last month. On a skim-solids basis, imports for the third quarter were 1.5 billion lbs., 0.4 billion lbs. higher on a year-over-year basis and 0.1 billion lbs. more than projected last month. Notably, from August to September, monthly imports rose 26.1% for milk protein concentrate (40-90% protein) and 42.5% for milk albumin.
• U.S. exports decline, imports to increase
With recent declines in exports and the persistent gap between domestic and international export prices, export projections for the fourth quarter of 2014 have been lowered by 200 million lbs. on a milk-fat basis and 900 million lbs. on a skim-solids basis. Export forecasts for 2015 have been lowered significantly, to 11.0 billion lbs. (0.4 billion lbs. less) on a milk-fat basis and 37.4 billion lbs. (1.2 billion lbs. less) on a skim solids basis. This reduction primarily reflects expected weaker exports for the first half of 2015. Year-over-year, exports are forecast to decline 10.6% on a milk-fat basis and 2.5% on a skim-solids basis. Exports in the second half of 2015 are expected to exceed the first half as global demand reflects an end of Russia’s import ban and the gap between U.S. and foreign export prices narrows.
With recent increases in imports on a skim-solids milk-equivalent basis, projections for 2014 fourth-quarter imports have been raised by 0.1 billion lbs. over last month’s forecast. Following lower than projected imports on a milk-fat basis for the third quarter, imports for the fourth quarter of 2014 have been lowered by 0.1 billion lbs. For 2015, annual imports on a milk-fat basis are unchanged at 3.8 billion lbs. but are increased by 0.2 billion lbs. to 5.4 billion lbs. on a skim-solids basis.