Dairy Outlook - June 2013

Market Psychology

The CME block price fell by 7% in the last month, ending 13¢/lb. lower at $1.75/lb. This price decrease occurred in the first half of May, and the cheese price has been flat since. Whey prices are unchanged during the same period. The whey price has been flat since April 1.   Butter fell steadily through much of May, and since has been stabile since at $1.545/lb., 14.5 cents below a month ago. Skim milk powder rose in early May and has been steady since, although it is 6¢/lb. above this time last month.  The story across the entire dairy product mix is that prices have stabilized in recent weeks.

Table 1 lists some past and estimated future milk prices. The May Pennsylvania all-milk price was $0.20 higher than April at $21.00/cwt. The May Class III price was $0.93 higher than in April at $18.52/cwt.  The Class III futures price for June is $0.41 lower at $18.11.  As of now, the Class III futures prices for the rest of 2013 are higher than those seen in January-May, averaging $18.67/cwt.  The May Class IV price was up $0.79/cwt. from April at $18.89/cwt. The Class IV futures price for June is $19.03.  Class IV futures prices average 19.18/cwt. for the rest of 2013.  Based on the futures prices, the forecast PA all-milk prices for 2013, are also shown in Table 1.  My forecast of the average PA all-milk price is $21.62/cwt. for 2013 overall, or $1.58/cwt. more than the 2012 average price.  In total, the outlook for farm milk prices is better than last year, and much more stable.

The U.S. dollar is down 0.5% in the past month against the Euro and up sharply against the New Zealand and Australian dollars. These latter two currencies fell 7 and 8% against the greenback in the last month, respectively.  Both economies are very export focused, and very dependent on the Chinese market and its Asian neighbors.  China has reported weak economic figures.  In early 1998, I lived in Australia and the economies of the so called Asian Tigers of Malaysia, Thailand, South Korea, and Vietnam collapsed.  This threw the entire region into a funk and hurt Australia’s economy badly.  This year may not be comparable, but the importance of East Asia on global dairy imports is enormous, and since New Zealand and Australia are major dairy exporters, the impact on world prices if China and its neighbors struggle could be great.  We exported 15.7% of milk production in the first third of 2013, so our dairy industry is now tied to world markets, like it or not. 

As I write this, the Senate has just passed its version of the Farm Bill.  The House will address the Farm Bill this month.  The politics of agriculture in the House and Senate are quite different, so what ultimately is signed into law is yet to be determined.  The dairy stabilization program in the Senate Bill is similar to last year, which John Boehner, the Speaker of the House, vehemently opposes.

Corn and Soybean Markets

Corn and Soybean markets rallied in late May as cold and wet weather continued in the Corn Belt.  They have drifted down since June 1, but September corn is still $5.75/bu.  At this point most of the corn has been planted, but some may struggle from the excess rainfall. Soybean prices have risen steadily for five weeks, ending $1.30/bu. about May 1 prices for the September contract at $15.12/bu.  After several weeks of doing nothing, corn prices are responding to any change in the weather.  Ordinarily this is not a dynamic period for grain prices, but that is not be the case this year, given the small expected ending stocks from the 2012 crop, and the potential implications of another bad crop.

Income over Feed Costs (IOFC)

Penn State’s measure of income over feed costs rose by 2.5% in May.  This halts the string of decreases in this measure in 2013, essentially offsetting the drop in April. The May value is $7.40/cow/day. As seen in Figure 1, the IOFC level for May 2013 is almost exactly the average value of May in the past four years.  Two thirds of the increase in IOFC is because of higher milk price and one third because of lower feed costs.  The May PA all-milk price rose by $0.20 from April to $21.00/cwt.  The cost of feeding a cow fell by 5¢/day to $6.25. The big driver of this was alfalfa hay, which fell by 6%. Corn and soybean meal prices each rose, as markets responded to news about weather in the Corn Belt.  The net change lowered feed costs by 0.75%. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day.  Compared to last year or most recent years, the changes in income over feed cost are small. Figure 1 and Table 2 showing the monthly data are appended. 

The allocation of the revenue per hundred pounds of milk is shown in Table 3.  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 May PA milk margin was 2.5% higher than April. 

Milk Production

As can be seen in Figure 2, milk production for April was slightly more than the previous April.  April’s milk production was 0.2% above April 2012. The growth in milk production continues to track 2012, rather than the year-over-year production increases of the past three years.  In this case, on a normalized 30-day month basis, the milk production increases are consistent with the usual seasonal pattern, rather than any expansion.   I view the latest report to be positive for milk prices.

Tables and Figures

Table 1.  Milk Prices and Milk Futures Prices for 2012 and 2013
(Based on futures prices of June 10, 2013)

Table 2: PA Income over Feed Costs

Table 3: PA Milk Margin

Figure 1:  Pennsylvania Income over Feed Cost

Figure 2: Monthly Milk Production (30 day months)