The good news is that the Producer Price Differentials (PPDs) in Federal Orders that base prices on components will be less negative moving into the fall months, says Wisconsin dairy economists Bob Cropp and Mark Stephenson.
The bad news is the reason: Class III prices are falling from well above $20/cwt to the $16 range.
“August should be the last month of the bigger negative PPDs,” says Stephenson. “We’re getting rid of negative PPDs because Class III prices are dropping like a brick.”
The August PPD will still be negative based on advanced Class III prices of $19.45 and Class IV prices of $13.40, says Cropp. But current cheese prices in the $1.70/lb range suggests a Class III price of $16 or less, he says.
The current futures markets are also trading at $16. “Right now, I think the futures might be right, and we could drop a little bit below $16 in September” he says.
Still, there could be some strength in the Class III market this fall. Two things must happen, says Cropp. First, milk production must slow. That could happen as prices soften. Also, the markets must see some normal, seasonal demand increase in the fall as manufacturers build butter and cheese inventories for year-end holiday buying.
“So we could be in the strong $16s for Class III this fall, and maybe $17 in November,” says Cropp.
But there’s still lots of uncertainty ahead. USDA is forecasting 1.8 to 1.9% production growth next year. “If milk production were that strong, it’s going to take some pretty good exports to maintain prices,” says Cropp.
Stephenson agrees. “It’s hard to see what the long-range forecast is right now,” he says.
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