Dunn: May dairy outlook

Lower feed prices only partially offset a lower milk price, sending Pennsylvania’s April income over feed costs (IOFC) and milk margin down slightly, according to Jim Dunn, professor of Agricultural Economics, Penn State University.

In his monthly Dairy Outlook report, Dunn estimated the April Pennsylvania all-milk price was 40¢ lower than March, at $18.60/cwt.  Corn and hay prices fell, while soybean meal was higher, with a net drop is daily feed costs of 21¢.  IOFC reflects daily gross income less feed costs for an average cow producing 65 lbs. of milk. The net effect was an IOFC drop of 5¢/cow/day, to $6.14. 

Food costs per cwt. of milk produced averaged $9.15/cwt, down 32¢ from March. The milk margin, the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid, was $9.56/cwt. in April, down 8¢ from March. 

The large increases in milk production worldwide have shaken dairy markets, Dunn said.

The butter price has fallen steadily since April 1, until a small uptick in the last two days. CME butter is at $1.32/lb., down from

$1.41/lb. at my last newsletter. Skim milk powder lost 4% and dry whey 5% during this three week period.

Cheese prices have been stronger than these products, in that they were stable for much of the period, before losing 2% early last week, regaining a bit of that on Friday. Of course, these events hit Class IV futures especially hard. For example, since Feb. 1, the July Class IV contract has slipped from $16.80/cwt. to $13.46/cwt., and while the corresponding Class III contract has fallen as well, in the same period it fell from $17.00/cwt. to $14.89/cwt.

The April Class III price is the same as March, at $15.72/cwt. The Class III futures price is $15.26/cwt. for May 2012, and averages $15.33/cwt. for May through December, so, on average, Class III futures prices are not expected to fall much further. 

The April Class IV price fell by 55¢ from March, to $14.80/cwt. The Class IV futures price for May 2012 is now $13.55/cwt. and averages $13.90/cwt. for the remainder of 2012. It is unusual for the Class III and Class IV to have such different outlooks, and this probably does not bode well for Class III. 

Dunn's forecast all-milk price for the rest of 2012 is $17.91/cwt. As of May, he forecasts of the 2012 Pennsylvania all-milk price will average $18.44/cwt., down 38¢ from his April estimate, and $3.68/cwt. less than the 2011 average.

The high feed costs will continue, at least until September, so margins will be a problem for the rest of 2012, he added. Fall feed prices depend on growing season weather. Milk Income Loss Contract (MILC) payments are certain given the higher feed prices.

Since last month, the U.S. dollar has gained 2.9% against the Australian dollar, 3.6% against the New Zealand dollar, and 1.9% against the Euro. The Greek debt crisis is back in the news as the recent elections left the country without a government and an increasing likelihood that Greece will exit the Euro, throwing its recent debt deal in doubt. Likewise, President Sarkozy was defeated in France’s election. The European political scene is bewildering in any period, but in this difficult time it is doubly perplexing. The ability of the European Union to muddle through this crisis seems to be a greater challenge each month. The strength in the dollar is a reflection of the international traders’ faith in the greenback during difficult times, rather than a vote of confidence in our own attempts to put our fiscal house in order. However, a stronger dollar is not good for dairy exports, and exports are essential given the increased milk production.

Corn and soybean markets

The most recent USDA grain outlook projects a record 2012 corn crop of 14.79 bil. bu., almost 20% greater than the 2011 crop. Partly this larger crop is because of increased corn acreage and the rest a projection of a return to normal yields. Should this large crop occur, the short corn inventories of recent years will be eased, despite the large ethanol production. The crop report has led to a decrease in corn prices, especially new crop corn. The same forecasts project an increased soybean crop, despite the

acreage shift into corn. Once again normal yields are important here. For both corn and beans, normal weather is expected, but whether the weather is “normal” this summer remains to be seen. With soybeans, should prices remain high, Brazil and Argentina can increase soybean acreage, and apparently intend to do so. During the last month, the corn market has fallen a bit, as has the soybean market.

Soybean meal is up a bit from last month to $411/ton. The May corn contract is now $6.08/bushel and the May beans contract is $14.04/bushel. Of course, none of these prices are low, especially relative to the milk price. Purchasing feed will be a burden given current and future milk prices.

To read Dunn’s complete monthly analysis, visit http://dairyoutlook.aers.psu.edu/.