Dunn: April Dairy Outlook

By Jim Dunn, Professor of Agricultural Economics, Penn State University

Market Psychology

Since April 1, Class III milk futures have fallen steadily, with June showing the largest drop and the contracts at the end of the year the least. Immediately after my last report, block cheddar dropped 14¢/lb. to about $1.49/lb. where it stayed until the last few days, when recovered it a bit to $1.5225.

 

Butter began to drop with cheese, but rather than plummet it fell more gradually, now at $1.41/lb. Unlike cheese, it has shown no hint of a floor. Skim milk powder prices and whey have fallen as well, with whey falling 14.5% since the last report. In total these weak spot-markets are reflected in lower expected prices for the near term, with June Class III futures more than a dollar below April.

 

At $18.70/cwt., the March Pennsylvania all-milk price was 90¢ lower than February. The March Class III price is 38¢ less than February at $15.72/cwt. The Class III futures price is $15.73/cwt. for April 2012 and averages $15.49/cwt. for April through December, so Class III futures prices are not expected to fall much further on average. The March Class IV price fell by 57¢ from February to $15.35/cwt. The Class IV futures price for April 2012 is now $14.83/cwt. 

 

The forecast Pennsylvania all-milk prices for 2012, based on the futures prices, is $18.82/cwt. for 2012, down 60 cents from my March estimate. The forecast Pennsylvania all-milk price for all of 2012 is $3.30/cwt. less than the 2011 average. The high feed costs will continue, at least until September, so margins will be tight in 2012. Of course, feed prices in the fall depend on the growing season weather. Milk Income Loss Contract (MILC) payments seem to be a certainty given the higher feed prices.

 

Since last month, the U.S. dollar has lost 1.0% against the Australian dollar, 0.1% against the New Zealand dollar, and 0.2% against the Euro. The Greek debt crisis now has a temporary solution, but the International Monetary Fund has said that the Euro zone must address its deficits. Of course, the United States has the same issue, but right now the low interest rates are postponing the crisis that will ensue when rates rise. In any case, the dairy export statistics remain positive, which is essential, given the level of milk production.

 

Corn and Soybean Markets

During the last month, the corn market has fallen, while the soybean and soybean meal markets are up sharply. The May corn contract is now $6.12/busel and May beans are $14.47/bushel. Beans are 92¢/bushel higher, and corn is 30¢ lower than a month ago. The soybean movement is the result of reduced acreage in the planting expectations and rumors that China is buying more soybeans. Also, drought estimates in South America are worse than last month, making our reduced acreage more of an issue. Soybean meal futures have followed the soybean market, with May meal futures now at $406/ton, the highest since 2008.

 

Income over feed costs (IOFC)

Penn State’s measure of income over feed costs fell once again in March. Although feed prices were slightly higher, the real cause was a lower milk price. The net effect was a decrease in income over feed costs of 66¢/cow/day in March to $5.97/cow/day, down 10% from February. The Pennsylvania all-milk price was down 90¢ to $18.70/cwt. Feed costs rose from last month by 7¢/cow/day. Corn, alfalfa hay, and soybean meal prices were each up in March, with soybean meal prices up the most at 3%.

 

IOFC was at the lowest level since September 2009, when it was at $5.24/cow/day. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk. The current high meal prices will make the April feed cost estimate higher, despite the lower corn prices in April. 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 March Pennsylvania milk margin was down 10% from February.

 

To see the full report, visit http://dairyoutlook.aers.psu.edu/