Feed Prices Down, Milk Futures Up

4/20/2013 7:00 AM

The block price for cheese on the Chicago Mercantile Exchange rose by 13.7 percent since last month, ending 21 cents higher at $1.76 per pound. Drought in New Zealand has led to price increases on world markets, and the latest U.S. milk production report shows moderate growth.

Whey prices fell during the same period by 9.3 percent. Whey inventories are much higher than a year ago and the market will not absorb the surplus unless the price falls further.

Butter rose steadily through early March, slid and then recovered in early April. It is now 7.5 percent above a month ago, at $1.71 per pound. The drought in New Zealand is a factor here as well.

Skim milk powder changed direction last week, rising 7 cents per pound in response to limited offerings by Fronterra in New Zealand.

The March Pennsylvania all-milk price was 30 cents lower than February at $20.80 per hundredweight. The March Class III price was 37 cents less than February at $16.93 per hundredweight. The Class III futures price for April is 59 cents higher than this.

As of now, the April Class III futures price is the lowest for 2013, with the remaining eight months averaging $19.04 per hundredweight.

The March Class IV price was unchanged from February at $17.75 per hundredweight. The Class IV futures price for April is $18.30. The Class IV futures prices average $19.67 for the rest of 2013.

My forecast of the average Pennsylvania all-milk price is $22.06 per hundredweight for 2013 overall, or $2.03 more than the 2012 average price.

The U.S. dollar is down 0.4 percent in the past month against the Euro. The Australia and New Zealand dollars are stronger than the dollar, each up by 1.1 percent since last month.

In the past month, the Euro zone was shaken by the bank crisis in Cyprus, where the banks had enormous amounts of international deposits, especially from Russia, and had invested these deposits heavily into Greek bonds.

When the value of the Greek bonds decreased in response to Greece’s debt problems, the solvency of the Cyprus banks was undermined.

The solution finally agreed upon was to tax all deposits greater than 100,000 euros by 40 percent, essentially penalizing the international depositors for being foolish enough to put their money in a Cyprus bank.

Understandably, Russia is livid, but the Euro stabilized once the deal was made. Like the American debt crisis, the European Union has “kicked the can down the road,” finding a temporary fix, but still leaving the underlying problems in several member nations unaddressed.

Corn and Soybean Markets

According to the USDA Prospective Plantings report, corn acreage will be the most since 1936, at 97.3 million acres. Of course, this is in response to the drought and the very low expected carryover into the next crop year.

The big change is more corn acreage in the south-central states of Arkansas, Mississippi and Texas. Much of these acres are coming from cotton.

Soybean acreage is expected to be down slightly from 2012, but greater than in 2011. This news dropped the nearby corn contracts by almost $1 per bushel in a couple of days.

Soybeans and soybean meal followed a similar path, although they are down less on a percentage basis.

The increased acreage and the increased corn planting outside the Corn Belt effectively made the downside risk of potential further drought in the Corn Belt less.

Of course, the increased corn production in Brazil is important as well, since that also diversifies world corn supplies out of such a compact area.

Taken as a whole, the effect is to reduce the cost of feed purchases by at least 10 percent since last month. When combined with the much improved milk futures prices, the dairy outlook is much improved from a month ago.

Income Over Feed Costs

Penn State’s measure of income over feed costs fell by 1.9 percent in March. This is a drop of 10.1 percent so far this year, and the March value is $7.41 per cow per day, which is a bit above the average value of the past four years.

The source of the change is the lower milk price. The March Pennsylvania all-milk price fell by 30 cents from February to $20.80 per hundredweight. The cost of feeding a cow fell by 5 cents per day to $6.11.

Alfalfa hay was down 2.3 percent and soybean meal was down by about 2 percent. Corn was up 1 percent. This combination lowered feed costs by 0.9 percent.

The USDA estimated all-milk price for February was adjusted up in March, meaning the March level, so far, is above the earlier estimate for February.

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 with income over feed cost, this measure shows that the March Pennsylvania milk margin was 1.9 percent lower than February.

Milk Production

Milk production for February was essentially unchanged from the previous February, after adjusting for leap year. This production is a continuation of the trend of January, where the 2013 is not repeating the large increases of early 2012.

In this case, on a normalized 30-day-month basis, February 2013 is 1.9 percent greater than January 2013, while February 2012 was 2.5 percent greater than the prior month. Thus the increase in monthly production is less than one year ago by either measure.

The U.S. dairy herd is 0.4 percent below the same month a year earlier, which is a rate consistent with a gradual increase in milk production.

I continue to expect the milk production increases to be less than a year ago, which should reduce the risk of a midyear collapse in price.

Jim Dunn is a Penn State professor of agricultural economics.

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