Dairy prices don’t make sense, for now

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After a few years of marginal to abysmal margins, dairy producers have enjoyed very strong margins for quite a few months.

And it looks like this string of decent margins might last a while longer. Last week, the U.S. Department of Agriculture announced the August Class III price at $22.25/cwt, up $4.34 from August 2013, and up 65 cents from last month.

Based on the current September futures, which closed at $24.32/cwt Sept. 5, we should expect strong milk prices for a while longer. Meanwhile, the Class IV prices also remained very high, settling in at $23.89 in August, up $4.82 from last year, and 25 cents from July.

Of course, current dairy product prices are responsible for these high class prices. On the cash market, butter is now trading at $2.85/lb — a new record. Meanwhile, cheddar barrels and blocks were trading as of late last week at $2.32 and $2.35/lb, respectively.

Clouds on horizon

So, why am I concerned? Although the September Class III futures are moving up, all other contracts are moving down. People trading these contracts must realize that our domestic prices are no longer exempt from world prices.

This pressure from world markets is already evident in our domestic nonfat dry milk (NDM) market. In early April, NDM was trading around $2/lb on the Chicago Mercantile Exchange (CME). It is now trading at $1.33/lb, a 33 percent drop.

NDM is produced primarily for the domestic markets, whereas Skim Milk Powder (SMP) is what is produced for exports (the two products are very closed in composition, differing mainly by the maximum amount of moisture).

Well, guess what happened in July? Manufacturers switched their drier settings away from SMP (the stuff that we would like to export) to NDM (the stuff that must find a home in the U.S.). We have to go back all the way to June 2012 to find manufacturing output of SMP this low, and output of NDM this high.

Our stocks of powder are now 21 percent higher than at this time last year: we have an additional 250 million pound of powder in U.S. warehouses. Our powder exports fell by 17 percent from June to July.

Competition for powder

It is simply difficult to sell U.S. powder when world customers can supply themselves cheaper somewhere else. What about our cheese and butter exports, you might say!

Well, our butter exports dropped to 11.9 million pounds in July, which was 7 percent lower than in June, and nearly 40 percent less than July 2013.

Cheese exports in July also slipped compared to June, although still above July 2013. The reality is this. Because of the economic penalties imposed on Russia for its role in Ukraine by the European Union, Russia reciprocated by banning the import of most dairy products from the European Union.

Cheese and butter prices in Europe are falling and are already substantially less than our domestic prices. Combined with the recent move by the European Central Bank who lowered interest rates, this situation makes it very favorable for Europe to export cheese and butter to the United States.

This, of course, could have a substantial effect on our prices. In addition, the dairy season is now in full swing in Oceania, with significant increases being projected for New Zealand and Australia. New Zealanders have already seen a drop in world butter prices from $4,500/metric ton in March, to $2,600/MT now.

Compare these prices to the current $6,200/MT for U.S. butter. … It won’t take long for the Kiwis to figure out that they could make a bit of money by shipping butter to the U.S.

Prices can change

Now you should understand why I stated that milk prices don’t make sense … for now.

Mind you, I could be wrong; I was wrong once before. … My point is that there are many economic indicators pointing to potentially lower milk prices — much lower prices in late fall.

The USDA has finally released its rules for the Margins Protection Program (MPP). On Sept. 15, the Wayne County Extension (in Ohio) will be hosting an information program at the OARDC Shisler Center.

You can also check for additional information on our website (http:// dairy.osu.edu). The sky is darkening; you don’t have to stand in the middle of the field waiting to see if the storm will hit or move to the North.

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