What’s the dairy outlook for the rest of the year?

By JIM DUNN
Penn State University Ag Economist

The CME block cheese price rose by 6.9% in the last month, ending 9.8 cents/lb. higher at $1.78/lb. This price increase was a pretty steady rise, with the largest change in mid-July.

The latest cheese production report was an all-time high for June. With the Class III price well below Class IV, the milk may move more to Class IV, which will help buoy cheese prices.

Whey prices are about the same as last month, down 25 cents/lb. Butter has zigzagged down in the past month, to its current $1.454, down 4.7%. Skim milk powder continues to be strong, rising 4 cents/lb. in gradual steps since early July.

Global markets

International powder markets continue to be strong. In a recent development, “the Chinese have temporarily suspended importation of whey powder and dairy base powder (a whey based dairy ingredient used in the manufacture of infant formula) produced by Fonterra, or produced in Australia using Fonterra’s whey protein powder as an ingredient (including whey protein concentrate).”

Fonterra is a New Zealand dairy company, cooperatively owned, that manufactures and exports dairy products from New Zealand, and is the biggest player in dairy export markets.

Milk for infants is a sore point for the Chinese, who had a domestic problem with tainted infant formula not long ago that led to a loss of confidence in domestic milk sources, especially for children.

Milk prices

The July Pennsylvania all-milk price was 30 cents lower than June at $20.70/cwt. The June price was also restated by USDA from $21.40 to $21. The initial all milk price that is reported is always an estimate.

The July Class III price was 64 cents lower than in June at $17.38/cwt. The Class III futures price for August is $17.95.

Class III futures 2 prices for the rest of 2013 are have lost ground since last month, averaging $17.53/cwt. for the remainder of 2013. The July Class IV price was up $0.02/cwt. from May at $18.90/cwt. The Class IV futures price for August is $19.35. The Class IV futures prices average 19.28/cwt. for the rest of 2013.

Pa. forecast

My forecast of the average PA all-milk price is $21.17/cwt. for 2013 overall, or $1.14/cwt. more than the 2012 average price. This is 19 cents/cwt. lower than a month ago, as the dairy price outlook is worse.

Fortunately for farmers, the Class I price is based on the higher of Class III and IV, so the sizeable spread of Class IV over Class III is keeping the blend price higher, especially in areas like the Northeast and Southeast, where Class I usage is high.

Other factors

The U.S. dollar is down in the past month against the Euro and the New Zealand dollar and unchanged against the Australian dollar. The Euro in particular is stronger, up 3.8%. The New Zealand dollar is up 2.6%. The dollar is still strong compared to Australia and New Zealand, which hurts our export competitiveness.

Congress has gone on vacation without finishing the farm bill. The Senate passed a complete farm bill, while the House passed a farm bill without the nutrition programs. The farm bill, the budget, and lots of other business that seem essential are still undone. The so-called “Dairy Cliff” will not return until the end of the year, so there should be plenty of time.

The House is trying to repeal the “permanent law,” portions of the 1949 and 1938 farm bills that are suspended in each farm bill, and are the source of the “dairy cliff” and other antiquated policies that go back into effect should a farm bill that suspends them not be passed.

This ensures that Congress will pass the farm bill, usually. In the absence of permanent law, the incentive to pass a farm bill is much less.

Corn and soybean markets

Nearby corn futures markets have dropped sharply as the outlook for the 2013 crops look very good. Of course, that crop is not available yet, so cash prices are much higher than even September futures prices.

Acreage planted is the highest since 1936 and the weather has been favorable, so the corn crop should be a record and we should see lower prices and sizeable inventories if the weather doesn’t change abruptly.

December futures are $4.59/bu., while the September contract settled at $4.72.

The soybean situation is similar. The September soybean futures contract is at $11.93/bu. and the November contract settled at $11.67. The August contract is at $13.24. Soybean meal reflects the same situation.

In all three markets, all contract prices are lower than last month, but especially the September contracts. The expectation is obviously that new corn and beans will be available by mid-September, although until then spot markets will be much higher.

Income over Feed Costs (IOFC)

Penn State’s measure of income over feed costs fell by 4% in July. This is a decrease of 30 cents/cow/day. The July value is $7.36/cow/day.

The IOFC level for July 2013 is below the average value for July in the past four years. Most of the decrease in IOFC is because of a lower milk price, which fell by 2.4% from June levels.

The July PA all-milk price fell by 30 cents from June, to $20.70/cwt. The cost of feeding a cow rose by 10 cents/day to $6.09. The corn price fell by 37 cents/bu., but soybean meal rose by more than 32% from the previous month, following national prices.

The national prices have since fallen sharply, which will help the August IOFC. The alfalfa hay price rose by 3% to $207/ton.

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.

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 July PA milk margin was 4% lower than May.

Milk production

Milk production for June was 1.5% more than the previous June. Although milk production is falling seasonally from its April high, the decreases are less than last year.

Although this is not alarming yet, further expansion of production could hurt prices. As the new corn and soybean crops are harvested, feed prices should drop sharply, making lower milk prices more bearable. However, we have seen many times, that when the price begins to drop, it usually drops sharply.

No one wants to make a storable product like cheese at high prices today if they anticipate lower prices in a month.