Dairy profitability looks better in 2017

Feed alley
(Farm and Dairy file photo)

By Jim Dunn
Penn State Ag Economist

UNIVERSITY PARK, Pa. — The Class III milk price in March was $1.07 lower than in February, while the Class IV price was down $1.47.

Class III continues to be higher than Class IV. Cheese prices have been falling, dropping 99 cents/pound since last month. Exports have been recovering, despite the expensive dollar and the rhetoric in Washington bashing trade agreements.

Cheese demand in the next few months will be lackluster anyway. The dollar is still strong, and the value of the Euro and New Zealand and Aussie dollars are essentially what they were a month ago. Cheese prices fell 6.2 percent in March and skim-milk powder fell 5.1 percent, while butter fell 3.9 percent.

Dry whey prices rose 4.5 percent. Exports of dry products have been stronger, with China and Mexico being particularly strong. Milk production is still dropping in New Zealand and Europe, no doubt in response to the continuing low milk prices. Skim milk powder futures have leveled off since March 1, after a steady decline earlier in 2017.

2017 forecast

Class III and class IV prices for most of 2017 are expected to be higher than they were in 2016. My estimated average for the Pennsylvania All Milk Price for 2017 is $1.63 higher than the 2016 average.

The latest Drought Monitor shows drought for dairy producing areas only in southeastern Pennsylvania and parts of New England.

The long-term issues depressing dairy prices are the strong dollar, the continuing Russian embargo on EU dairy imports, and problems in the Middle East.

Overall, the outlook for milk prices for 2017 is better than 2016, although not as attractive as it was a few weeks ago. Feed prices will remain low so dairy profitability this year should be better than in 2016.

Corn and soybean prices

Corn and soybean meal prices are lower than last month, with corn down 6 percent, meal down 6 percent, and soybean prices down 6.5 percent.

The South American corn and soybean crops will be very good and world inventories are very high. U.S. exports of corn and beans are large despite the strong dollar. There is no reason to expect corn and soybean meal prices to increase, given the very large inventories worldwide if 2017 crops are good.

Income over feed costs

Penn State’s measure of income over feed costs fell by 0.5 percent in February from its January value. February’s value is about the same as the last two months, with all three months well above 2016.

Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day.

I also calculate the milk margin, or the estimated amount of the Pennsylvania all milk price that remains after the feed costs per hundredweight of milk production are paid. The February Pa. milk margin was 0.5 percent lower than in January.

Milk production

The latest U.S. milk production report showed February milk production up 2.2 percent from a year earlier on a 30-day month basis.

This milk production increase is hurting prices since the dollar is high and the domestic market will not absorb the extra milk. Unfortunately the other dairy exporters are increasing milk production as well.

Milk production in Pennsylvania in February was 2.4 percent over its 2016 level, when adjusted for 30 day months. Finding markets for all this milk is a challenge.

Cow numbers grew slightly from January and increased by 0.55 percent over February of last year. Although this increase in cows is very small, when combined with the strong dollar, growth in milk production nationally will limit higher milk prices.

(The author writes a monthly Dairy Outlook that is available by email.)


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