Economic Uncertainty Affecting Domestic Dairy Market

3/9/2013 7:00 AM

The block price for cheese on the Chicago Mercantile Exchange rose slightly in mid-February, before losing 15.5 cents a pound to settle at $1.55 per pound.

The latest cold storage report showed very high cheese inventories, which suggests that cheese consumption during the holiday season was worse than expected.

There are no big cheese consumption periods coming up, but we are entering a period of increasing milk production, which will mean accumulation of additional stocks.

Since last month, both cheese blocks and whey prices have fallen about 6 percent. Butter followed a similar pattern, but bumped up at the end of the month.

For butter over the past month, the price has risen by 2.3 percent and skim-milk powder has fallen by 1.8 percent. The butter story is similar in that inventories are high and disappearance has been disappointing, making the butter price vulnerable.

The uncertainty about the economy is still affecting the domestic markets. Although export demand may be OK, the domestic market is dicey. Long term, the Chinese market is suspect, although that is still in the future.

The February Pennsylvania all-milk price was $1 lower than January at $20.40 per hundredweight. The February Class III price was 89 cents less than in January at $17.25 per hundredweight.

The Class III futures price for March is 31 cents lower than this, but April futures are 42 cents higher than March at $17.36 per hundredweight. As of now, the March Class III futures price is the lowest for 2013.

The February Class IV price rose by 12 cents from January to $17.75 per hundredweight. The Class IV futures price for March is $17.65.

The Class III futures prices average $18.11 per hundredweight. for the rest of 2013 and Class IV futures average $18.14.

My forecast for the average Pennsylvania all-milk price is $21.23 per hundredweight for 2013 overall, or $1.20 more than the 2012 average price.

The U.S. dollar is up 3.5 percent in the past month against the Euro. The Australia and New Zealand dollars are also weaker versus the dollar by 1.8 and 1.3 percent. The stronger dollar makes our exports slightly less competitive.

The weakness in the Australian and New Zealand dollars is tied to potential problems with the Chinese economy as the Chinese government tries to limit speculative property investment.

China has been building expensive apartments and office complexes without any market to occupy these buildings for years, and this bubble may burst. If it does, it will hurt the economies of Australia and New Zealand in particular because they are driven by exports to China.

Obviously, if the Chinese economy should crash, it would hurt the entire world’s economy, and dairy markets as well.

Chinese citizens have lost faith in the quality of their domestic dairy production, and China has been the major dairy importer in recent years. For example, China’s imports of skim milk powder have increased fourfold from 2008 to 2012.

Corn and Soybean Markets

The corn futures markets are inverted right now, with the March futures price above May, May above July, etc. This is unusual, reflecting two odd features of the market.

The first is the considerable shortage of corn right now, and presumably a belief that additional corn will become available later in the season, whether because of a further decrease in exports or greater certainty that the 2013 crop will be better, both here and in South America.

The soybean market is showing the same inverted market, no doubt for the same reasons. The March price is higher than it was 10 days ago at $7.32 per bushel, essentially where it was a month ago.

Like corn, the March soybean contract has risen recently, after a dip in mid-February, and is now a few cents above a month ago at $14.96 per bushel. Soybean meal is $435 a ton.

The western Corn Belt is still very dry, especially Nebraska.

The latest USDA estimate of corn exports from the 2012 crop was lowered once again in February to 900 million bushels, less than half the exports from the 2010 crop.

A few years ago, the United States provided 65 percent of world corn exports. Brazil may export more than the United States this year. Our decades of dominance in the world corn market has disappeared, much as it did in soybeans earlier.

Income Over Feed Costs

Penn State’s measure of income over feed costs fell by 9.4 percent in February. This is the third monthly drop in a row, having fallen 21.1 percent from the November peak of $9.10 per cow per day. The level for February is almost exactly the average value of the past four years.

The February Pennsylvania all-milk price fell by $1 from January to $20.40 per hundredweight. Most of the change in IOFC is a lower milk price, although the cost of feeding a cow rose by 9 cents a day to $6.10.

Alfalfa hay was up 5 percent and soybean meal was up 6 percent. Corn was down 2 percent. This combination raised feed costs by 1.5 percent. The fall in the milk price was 9.5 percent.

Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day.

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 the February Pennsylvania milk margin was 9.4 percent lower than January.

Milk Production

Milk production for January was 0.5 percent more than January 2012. This increase is less than the increase of January 2011.

As I wrote last month, I do not expect the milk production increases to be as great in early 2013 as they were in early 2012.

In this case, on a normalized 30-day month basis, January 2013 is 1.7 percent greater than December 2012, while January 2012 was 2.8 percent greater than December 2011. Thus the increase in monthly production is less than a year ago by either measure.

The U.S. dairy herd is 0.2 percent below the same month a year earlier, which is a rate consistent with a gradual increase in milk production.


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9/2/2014 | Last Updated: 7:15 PM