Dairy Prices Still on an Upswing

10/13/2012 7:00 AM

Once again, dairy product prices have risen considerably in the past month. For example, the CME block cheese price, which sat at $1.73 a pound in early August, is now $2.10.

CME butter rose another 9 cents a pound and is now $1.95, a 4.8 percent increase from last month, and 48 percent above mid-May levels. Nonfat dry milk has risen another 3.8 percent, and dry whey is 8.3 percent above last month’s prices.

The heat, especially in California, high feed prices, and attractive cull-cow prices have reduced cow numbers and production, and the coming holiday season is prompting inventory build-up.

Of course, the difficult conditions for dairy, especially for producers who buy much of their feed, are still bad.

The higher product prices have fueled increases in Class III futures for the remainder of 2012. The small increases in butter and powder prices have meant no increases and even small decreases in Class IV prices.

The September Pennsylvania all-milk price was $1 higher than August at $18.90 per hundredweight. The September Class III price was $1.23 more than in August at $19 per hundredweight.

The Class III futures price is $21.17 per hundredweight for October and averages $20.96 for October through December, so on average Class III futures prices are expected to rise about $2 over the remainder of 2012.

The September Class IV price rose by $1.65 from August to $17.41 per hundredweight. The Class IV futures price for October is now $19.10 per hundredweight and Class IV averages $19.17 for the remainder of 2012.

The prices for the first half of 2013 show Class III futures drifting down but still averaging $18.55 per hundredweight. Therefore, prospects for both Class III and IV prices are better now than any time in 2012.

My forecast of the average Pennsylvania all-milk price is $19.99 per hundredweight for 2012 overall, down 17 cents from my estimate in September. The forecast Pennsylvania all-milk price for all of 2012 is $2.12 less than the 2011 average.

The forecast all-milk price for the rest of 2012 is $23.18 per hundredweight. Feed costs are still very high but down considerably from last month. The harvest results have been better than expected, although a surprising report on corn inventories last week sent corn up sharply.

The U.S. dollar has fallen against the Euro and New Zealand dollars, and is unchanged against the Australian dollar. Falling oil prices are an important driver of strength in the Euro. The Australian dollar is struggling as coal and iron ore prices have fallen decreasing Aussie export earnings.

The news from Europe about the debtor nations is much the same, and though no solution seems to be on the horizon, the outlook isn’t any worse either.

The news from the United States is similar to Europe. There is no movement on addressing the long-run issues of the country, but things aren’t much worse.

With no Farm Bill passed, we revert to the permanent law from 1949. This law uses parity as a guide for government purchases and would create chaos in the dairy industry, since the support price would be about $37.28 per hundredweight.

The grain programs would require similar actions, requiring untold billions to meet these two targets. No doubt some temporary action will extend the old Farm Bill, but should sequestration occur if Congress cannot reduce the deficit, huge cuts from the agriculture budget would be required, which would create significant short-term problems and long-term damage.

Corn and Soybean Markets

Corn and soybean prices fell sharply after the mid-September crop report, although corn bounced back at the end of the month with a surprising low stock report.

The industry concluded that USDA predicted a larger decrease in feed usage and therefore a larger carry-out from the 2011 crop.

Despite the bounce back, corn and soybean prices are much lower than at this time last month, with corn down 6 percent and soybeans down 13 percent.

December corn is now $7.57 and November beans are $15.32. Soybean meal is also down 14 percent to $465 a ton. Of course, these prices are still prohibitively high compared with the milk price, so despite the improving income over feed costs, margins are still much worse than in 2011.

Income Over Feed Costs

Penn State’s measure of income over feed costs rose by 16 percent in September. This is the first significant uptick of 2012. The milk price rose significantly, while the feed cost dropped, leaving a big improvement in income over feed costs.

The Pennsylvania all-milk price rose by $1 to $19.90 per hundredweight. In September, corn, hay and soybean meal prices all fell from their August levels, with the biggest decrease in soybean meal prices (7 percent).

Dairy futures are higher than September’s levels for the next five months, while feed prices are not, so income over feed cost should improve further in coming months. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk.

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 September Pennsylvania milk margin was up by 16 percent from August. Both income over feed cost and the milk margin are expected to improve in the remainder of 2012.

Milk Production

The monthly milk production report for August showed a decrease of 0.3 percent from August of last year, the first time it was below production from the year before since January 2010.

Cow numbers fell by 6,000 head from July, continuing the drift downward that began in May. Milk per cow also dropped below its level from August 2011, only the third time since 2005 that has happened. Very hot weather in California is the major reason for the drop in milk per cow.

Taken as a package, the reduced milk production and cow numbers will help sustain the higher dairy product prices.

Also, dairy exports have far exceeded imports for 2012 to date, and the average trade surplus has averaged $236 million per month for the first seven months of 2012.

Although the exports have been dropping in recent months, the net exports were still $170 million in July (the last month for which data is available.)

Jim Dunn is a Penn State professor of agricultural economics.

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