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Penn St. Dairy Outlook


The prices of all dairy product have been strong in the past month. The CME block cheese price rose by 13.4% in January, on the heels of the 9.5% increase in December. It is now $2.325/lb. Last March it was $1.55. Cheese prices have risen steadily since mid-November.

The continuing strength in export demand is the main cause, but modest increases in milk production (more below) are also important. CME butter prices also rose sharply, by 16%, or 26¢/lb. to $1.88 in the past month. The butter price began to climb rapidly after January 1, leveling off two weeks ago. The continuing export demand by China for powder is a continuing driver of the strength in dairy markets. Skim milk powder is up, but by a modest 1.7%. Inventories are less than the previous two years, which helps support prices. Dry whey prices rose 4% to $0.585/lb. It is very unusual for the prices of all dairy products to be so attractive together.

Regarding past and estimated future milk prices. The January Pennsylvania all-milk price was $0.60 higher than December at $24.00/cwt. This is the highest level since August 2011. Past high milk prices were accompanied by higher feed prices, so the present price is better once costs are considered. The January Class III price was $2.20 higher than in December at $21.15/cwt., reflecting the big increase in cheese prices. The Class III futures price for February is $23.08. Average Class III futures prices for 2014 are up $1.37 above the average 2013 prices at $19.36.

The February level is well above the futures prices for March and beyond, as the markets expect cheese markets to fall to more normal levels as the year progresses. The January Class IV price was up $0.75/cwt. from December at $22.29/cwt. The prices of Class IV futures average $20.64/cwt. for 2014, up once again from last month. Like Class III, the February futures price ($23.10) is the highest, with weaker Class IV futures as 2014 progresses.

Recent PA all-milk prices and the forecast prices for the rest of 2014 based on the futures prices. The forecast all-milk prices for 2014 average $1.40/cwt. above the average for 2013, with the highest prices in the first half of 2014.

The U.S. dollar is almost unchanged in the past month against the Australian and New Zealand dollars and the Euro. Compared to a few months ago, the dollar is stronger than the currencies of other dairy exporters, which will hurt our export competitiveness somewhat. The recent action of the Federal Reserve to reduce its increases in the money supply will raise interest rates and strengthen the dollar.

Corn and Soybean Markets
Corn has inched up since last month, ending at $4.43/bu. for the March contract. Despite the Chinese refusal to buy corn because of an unapproved GMO variety, the export demand remains strong, while better margins for ethanol plants have increased domestic usage. Soybeans and soybean meal are up a bit since last month, with beans up 19¢/bu. at $13.16/bu. for the March 2014 contract and meal up $13/ton at $442. The recent increase in soybean production in Brazil and Argentina is stunning. In the 2011-12 crop year, together they produced 106.6 mil. metric tons, while the latest USDA forecast for the 2013-14 soybean production by Brazil and Argentina is 143.5 mil. metric tons. Our production is just above Brazil’s. No doubt Brazil will pass us soon.

Income over Feed Costs (IOFC)
Penn State’s measure of income over feed costs rose by 3.5% in January. This is an increase of 36¢/cow/day. The January value is $10.74/cow/day, the highest value since September 2007. The increase in January is because of a higher milk price, which rose by 2.6% from November levels. Feed prices also rose, but by only 0.6%, because of higher corn prices. The cost of feeding a cow rose by 3¢/day to $4.86. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. 

The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. As does income over feed cost, this measure shows that the January PA milk margin was 3.5% higher than December.

Milk Production
Milk production for December was slightly less than in 2012. This lack of growth is reflected in the better milk price. Given the improvement in profitability in recent months, the lack of an increase is unusual. The December cow numbers are slightly below December 2012 and slightly more than November 2013. As with milk production, the stable cow numbers are surprising in the face of better margins. One thing that is important is that protein prices are not low, despite better weather in the Corn Belt in 2013.

Source: USDA