Price Trends Mixed for Dairy Products

1/12/2013 7:00 AM

Dairy product prices have been mixed in the past month, with block cheese dropping a few cents per pound and then returning to the same place it was in early December, $1.76 a pound.

Butter dropped 5 percent in mid-December and has been largely unchanged since, ending at $1.485 a pound. Both skim milk powder and whey powder are up a little (0.8 percent and 3.3 percent).

Since cheese and butter prices are both lower than in November, the nearby futures prices for Class III and IV are lower than their December values. The December Pennsylvania all-milk price was 50 cents lower than November at $23.10 per hundredweight.

The December Class III price was $2.17 less than in November at $18.66 per hundredweight. The Class III futures price is $17.97 for January, 30 cents below its value in last month’s report.

The December Class IV price fell by 83 cents from November to $17.83 per hundredweight. The Class IV futures price for January is $17.60. The Class III futures price averages $18.34 for 2013 and the Class IV futures price averages $18.07.

My forecast for the average Pennsylvania all-milk price is $21.39 per hundredweight for 2013 overall, or $1.32 above the 2012 average price.

Dairy cow slaughter in November was down, indicating that producer sentiment has been buoyed by the higher milk prices and lower feed costs. This should mean more milk production, which is reflected in the lower dairy futures prices.

Corn and soybean meal futures are each down about 10 percent from last month, as the markets are adjusting to the reduced supplies after the drought. The weather in South America is improving, and the western Corn Belt has been getting some precipitation.

The U.S. dollar is down slightly in the past month against Australian and New Zealand dollars, and the Euro. With the Fiscal Cliff averted for the moment and the old Farm Bill extended for a few months, the focus on Congress has shifted elsewhere.

Of course, neither fix solves the underlying problem but just delays the day of reckoning. China continues to be a major market for dairy products, especially from New Zealand and Australia, creating export opportunities elsewhere for American dairy exports.

Corn futures prices dropped steadily during December. Soybeans and soybean meal are down as well. Of course, feed prices are still high. March corn is now $6.85 and January beans $14.11.

Soybean meal is $408 a ton. As mentioned above, the weather in South America and the Corn Belt is a factor and corn exports are much lower.

Although our crop was down considerably, China and Russia had record corn crops.

Income Over Feed Costs

Penn State’s measure of income over feed costs fell by 6 percent in December, which is lower than the previous two months, but higher than any other month in 2012 and also the the highest December value in the past five years.

Of course, the rest of 2012 was another matter, with terrible levels for IOFC. The December Pennsylvania all-milk price fell by 50 cents from November to $23.10 per hundredweight.

In Pennsylvania in December, soybean meal and alfalfa hay prices rose from their November levels, with hay prices up 7 percent. Soybean meal was up 1.9 percent and corn was down slightly. This raised feed costs by 3.5 percent.

Dairy futures for the coming months are lower than December’s levels but not a lot, and the feed price situation is lower, although still at a high level.

Based on what is known now, income over feed cost will be less in coming months, but not dramatically so.

Income over feed cost reflects daily gross 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 December Pennsylvania milk margin was 6 percent lower than November.

Milk Production

Milk production for November was 1 percent more than the amount from the previous November. December 2011 and January 2012 milk production shot up from the November 2011 level, ultimately creating the surpluses than torpedoed the prices in the spring of 2012.

I don’t see the same optimism in the industry this year, and I expect any production increases in 2013 to be more moderate. A year-over-year increase of 1 percent is not a problem, but the 3 and 4 percent increases of early 2012 are not sustainable.

Like last month, the U.S. dairy herd is 0.2 percent below the same month a year earlier, which should also not overwhelm the market’s ability to take the milk without collapsing the price.

The final numbers for 2012 are now available, and the year as a whole turned out very differently than it looked a few months ago.

The Pennsylvania all-milk price began high and drifted down to its summer doldrums, but rose $6 per hundredweight from its June low until its November high. The milk margin followed a similar path.

Because the drought drove feed prices so much higher (and the bad weather in 2011 meant feed shortfalls for many Northeast farms earlier in 2012), most farms struggled from February through August or beyond.

The average all-milk price of $20.07 was $1.08 above the five year average of $18.99, but the milk margin was 53 cents per hundredweight below the five-year average.

Thus from a milk price perspective, 2012 was above average, but the milk margin per hundredweight tells a different story.

Jim Dunn is a Penn State professor of agricultural economics.

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