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Market Watch Diary: Moderate Prices Expected

February 1, 2012
By: Alan Levitt, Dairy Today Contributor
 
 

Levitt blueThe dairy markets usually don’t stay steady for long. By mid-January, traders were waiting for something to happen.

From this vantage point, I expect prices to float near $1.60 for cheese and butter and $1.40 for powder for the first quarter, at least, and maybe until May. And if that’s the case, it will presage much stronger prices in the second half of the year.

U.S. stocks are sufficient for current needs; international supply is adequate as well. Lags in the pricing system (plus the bonus provided by a strong whey market) mean the All-Milk price will likely still be $19 or better in January. By February, margins will be tighter.

The demise of the ethanol blenders’ credit and import tariff at the end of 2011 was hailed as a big victory for livestock producers, but the practical effect on corn prices is negligible. The Renewable Fuels Standard remains, mandating greater volumes of corn to be used as fuel. USDA projects 5 billion bushels of corn will be turned into ethanol this year—40% of the 2011/12 crop.

A shortage of seed corn after last summer’s dry conditions could crimp this year’s plantings.

The alfalfa situation isn’t much better. December hay stocks were down 11% from the prior year, sitting at the lowest figure since 1988. The looming return of drought in California after a one-year respite won’t help.

world milk production chart

In short, expensive feed is going to be problematic for dairy producers in 2012. That will lead to tighter supplies by midyear, enough to drive higher commodity and milk prices this summer.

And yet there’s not enough excess in the world market to push prices much lower. Production was heavy in 2011, but nearly all of it was consumed. A dry summer in South America will pinch supplies there, and New Zealand doesn’t have the capacity to repeat its double-digit growth in 2012. Slower growth also is expected in Europe.

At the 2012 Dairy Forum in California last month, Rabobank’s Tim Hunt opined that world prices for whole milk powder would generally range between $3,300 to $3,800 per ton in the near term. That equates to an implicit U.S. milk price of $16 to $19.50 per cwt.

I expect to see Class III prices average close to the lower end of that range in the first half of the

year and the high end of the range in the second half.

 

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USDA Livestock Dairy & Poultry Outlook

 

ALAN LEVITT is president of Levcom Inc. in Crystal Lake, Ill. You can contact him at (815) 459-1742 or alevitt@levcom.com.

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FEATURED IN: Dairy Today - February 2012

 
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