Milk Prices Higher Despite Large Cheese Inventories

7/13/2013 7:00 AM

The Chicago Mercantile Exchange block price for cheese fell by 5 percent in the past month, ending 8.75 cents lower at nearly $1.67 per pound.

Most of this price decrease occurred in the second half of June, and the cheese price has recovered slightly since. Cheese inventories are high, with May’s cheese inventories 8 percent higher than last year.

Of course in the second half of last year, cheese prices rose sharply, having done nothing in the first half. The lower inventories buoyed prices then, as they will depress prices now.

Whey prices are about the same as last month and have been flat since April 1.

Butter fell steadily through June, before recovering much of the losses in July. It was about $1.53 on July 5, about 2 cents below last month’s level.

Skim milk powder rose 3.75 cents a pound in gradual steps since early June. International powder markets continue to be strong, and powder prices are up 17 percent since March.

The June Pennsylvania all-milk price was 40 cents higher than May at $21.40 per hundredweight. The June Class III price was 50 cents lower than in May at $18.02 per hundredweight.

The Class III futures price for July is 78 cents lower at $17.24. Class III futures prices for the rest of 2013 have lost ground since last month, averaging 75 cents lower than at this time last month.

The June Class IV price was down 1 cent from May at $18.88 per hundredweight. The Class IV futures price for July is $19.10. Class IV futures prices average $19.09 for the rest of 2013.

My forecast of the average Pennsylvania all-milk price is $21.36 per hundredweight for 2013 overall, or $1.33 more than the 2012 average price.

The past month has been hard on Class III prices, reflecting the record cheese inventories. Despite the inventory levels, the industry is not particularly bearish about the prospects for cheese.

The big wild card is Australia and New Zealand. They and all of the other exporters have lower production, so U.S. export opportunities for cheese should be good.

The U.S. dollar is up in the past month against the Euro and the New Zealand and Australian dollars recently. All three are off by at least 2 percent since a month ago, with the Australian dollar especially weak. It was selling for $1.05 U.S. in January and is 90.6 cents now.

Corn and Soybean Markets

Nearby corn markets have been steady as recent news about corn inventories have been below market expectations, while the price for the 2013 crop has fallen sharply.

Acreage planted is the highest since 1936 and the weather has been favorable, so the corn crop should be a record and we should see lower prices and sizable inventories if the weather doesn’t change abruptly.

December futures are $4.91 per bushel, while the July contract settled at $6.85.

The soybean situation is similar. The July soybean futures contract is at $15.88 a bushel and the November contract settled at $12.28. Soybean meal reflects the same situation.

In all three markets, the nearby contracts are higher than last month, with corn and beans up 5 percent and meal up 9 percent. The harvest periods are all down, with December corn down 11 percent since June.

Income over Feed Costs

Penn State’s measure of income over feed costs rose by 7.4 percent in June. This is an increase of 56 cents per cow per day. The June value was $7.97.

The level for June 2013 is above the average value for June in the past four years. Most of the increase in is because of lower feed costs, which fell by 4.7 percent from May.

The June Pennsylvania all-milk price rose by 40 cents from May to $21.40 per hundredweight. The cost of feeding a cow fell by 30 cents a day to $5.94.

Both alfalfa hay and soybean meal fell by more than 8 percent from the previous month. Corn prices rose by 2 cents a bushel.

Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Compared with last year or other recent years, the changes are small.

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 costs, this measure shows that the June Pennsylvania milk margin was 7.4 percent higher than May.

Milk Production

May’s milk production was 0.8 percent above May 2012. After tracking 2012 milk production for the first four months of the year, May’s value decreased less than the drop of May 2012. It is likely that milk production values for July will be lower, as the extreme heat in the southwest will hurt production.

A Longer Run View: Exchange Rates

Exchange rates are an important part of the competitiveness of exports. A look at relative exchange rates for the U.S. dollar since January 2009 shows clearly that the price of American products compared with Australia and New Zealand is very different than when compared with the European Union, where the changes are considerably less.

In 2009, American dairy exports collapsed as the strong dollar made us uncompetitive. Since then, our exports have been much greater, with 2013 setting a record so far. The improvement in the relative exchange rates is an important part of that.

Earlier in this report I mentioned the drop in the Australian dollar. That means Australians traveling overseas find their money doesn’t go as far, while outsiders traveling to Australia find it more affordable. The trade impacts are the same.

Jim Dunn is a Penn State professor of agricultural economics.

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