Class III futures have made an impressive increase over the past month with the June contract increasing by over $4.00 per cwt. The last time we saw this type of movement in an actively traded contract was in the spring of 2020 after the impact of COVID-19 and the implementation of the Farm to Families Food program. This year it seems to be due to the lower level of milk production and the perception that milk supply will tighten as the year progresses. The current level of milk production is lower than last year due to reduced cow numbers. That is not expected to change much as the heifer supply is tight leaving it somewhat difficult for farmers to keep barns full.
The interest in beef-on-dairy remains strong as a profit center at present. Eventually, beef prices will decline, and the strong premiums realized for those calves will drop substantially. This may be somewhat similar to organic milk’s strong premiums over conventional milk. The premiums decreased significantly once more farms moved that way. As that happens in the future, there will be a large push to breed more cows to obtain more heifers as that will be the profit center. The markets will always move in cycles.
Despite lower cow numbers and the perception of a lower milk supply as the year progresses, the USDA increased its estimate of milk production for this year by one billion pounds in the May World Agricultural Supply and Demand report. The current estimate is for milk production to reach 227.3 billion pounds. They raised the production potential due to the better outlook for milk prices. They released their initial milk production for 2025 on the report with an estimated 229.3 billion pounds for the year. This year’s Class III milk price estimate was raised to $16.75, a significant improvement over the April estimate but remains below the overage price of $17.02 in 2023. The Class IV price was reduced by $0.15 to an average price of $20.25 and higher than 2023’s average for 2023. The All-milk price for this year was raised to $21.20 but remains $0.14 below the average of 2023. It is still early in the year and milk prices may change substantially and hopefully for the better. USDA was not as optimistic next year with an initial estimate for Class III at $16.30, Class IV at $19.95, and the All-milk price at $20.90. This does not give us much to look forward to.
The aspect that has changed significantly in the market is the price spread between Class III and Class IV milk futures. The June price spread between the two classes on April 11, was 3.97 cents with Class IV the higher class. Currently, the Class III price is above the Class IV price by about $0.20. The strength of Class IV prices above Class III, which have been prevalent for quite some time, may end with prices moving more in line again. The butter price has been strong and increasing, but cheese prices have gained faster significantly changing the outlook. Later contracts retain a discount of Class III to Class IV but that may change as the year progresses.
There is a strong possibility the butter price could continue to outpace cheese if the pattern is followed of the previous two years when the butter price made record highs. The early increase may indicate another very strong year when seasonal demand increases. Exports continue to lag substantially but are expected to improve as the year progresses and international demand improves.
For more on milk prices, read:
- EU Milk Collections Could be Stabilizing
- Dairy Profitability Remains Elusive, Regardless of Weaker Milk Supply
- Fewer Cows are Being Culled, Here’s the Main Reason Why
- Fewer Cows and Lower Protein Levels Have Done Little to Move Prices
- How Much Impact Has Avian Flu Had on Dairy Prices?
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
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