Overall, the market has not been supportive to milk prices. Both stability and weakness have been seen in all sectors and have turned traders more bearish on the price outlook. Somewhat stable cheese prices have not been enough to support Class III futures.

 

Current calculations of underlying cash prices, relative to futures, show May through July contracts at a discount to the Federal Order current price calculation as of the week ending April 27. However, weakness in dry whey is having a definite impact on price outlook. Heavy cheese production is keeping dry whey supply plentiful and readily available for demand.

 

Manufacturers are reducing prices to encourage sales. The current market setup is reminiscent of 2007 when prices reached nearly 80 cents and then fell over the next two years, dropping below 16 cents. The difference is that, in 2007, high prices impacted demand when they caused end users to find alternatives. This took some time to overcome because, once demand is affected, it takes time to bring back that demand. Now prices are declining due to heavy production and increasing supply.

 

Nonfat dry milk is facing the same issue as whey, with supplies continuing to increase. Powder production has been heavy as dryers have been absorbing some of the plentiful milk supply and running at capacity for quite some time. Regional prices continue to weaken as manufacturers cut prices and end users are purchasing on an as-needed basis. This is not just a domestic issue, Nonfat dry milk/skim milk powder prices are declining world wide. The latest Global Dairy Trade auction showed skim milk powder price down 7.6 %. All other products traded on that auction were also lower with the overall trade weighted average declining 9.9%.

 

Current price projections are for milk prices to remain depressed for the foreseeable future. Milk production remains strong. First-quarter milk production this year was up 5.2% and the strongest first-quarter growth since 2000. Cow numbers continued to increase in March, with the nation’s dairy herd up 86,000 head from a year ago. Per-cow production was up 59 lb. Even though cull cow prices are good and feed prices are high, tightening the milk/feed ratio significantly, producers are improving milk production in order to generate cash flow.

 

Low milk prices and tight margins have generated quite a bit more interest in the farm bill, especially the potential for a supply management program and the production margin protection program. A lot of debate will take place before the farm bill is finalized and adopted. Some indicate the supply management program aspect of the bill will come under extreme fire. Both the industry and dairy producers are on both sides.

 

It is interesting to note that when milk prices are high and income exceeds cost of production virtually no one wants a supply management program. When price is low and margins non-existent, many are clamoring for a supply management program. This debate has raged for quite some time but now seems to becoming closer to some form of adoption. Interestingly enough, Europe has been looking at eliminating its quota system in the next few years.

 

A concern of the current farm bill mark-up from the agricultural committee is the inclusion of this section: “Limitation. -- A dairy operation may only participate in the production margin protection program or the livestock gross margin for dairy program under the Federal Crop Insurance Act 25 (7 U.S.C. 1501 et seq.), but not both."

 

This section does not appear in the House version at the present time.

 

There will be much debate before this is all said and done. We certainly do not want an elephant that will be carried around for the duration of the next farm bill.

 

- Agricultural Prices report on April 30
- Fonterra auction on May 1
- California Class 4a/4b prices on May 1
- Dairy Products report on May 2
- April Federal Order class prices on May 4
- World Agricultural Supply and Demand report on May 10
- California Class I on May 10
- Fluid milk sales on May 11

 

 

In some of my other articles, I have written about the ever-increasing milk supply, and it remains at the forefront of dairy news.  Production during the winter outpaced the previous year by a significant margin due to mild weather.

 

This raised the idea that spring flush may not materialize due to already high milk production. However, spring flush is as strong as ever, with no slowing of milk flow. So much so that penalties are being imposed in the West while some other areas are indicating a loss of volume premium.

 

If the thought behind penalties is to deter milk production, it is not working unless some dairy producers go out of business. Most farmers are going to continue to push cows for greater production to compensate for lower prices. They will take the penalty or loss of volume premium for a short period of time to keep cows producing at their potential. They do not want to cut back on nutrition as it will affect the lactation curve of the cow.

 

USDA’s Dairy Market News indicates heavy milk receipts are resulting in unloading delays in the Northeast and Mid-Atlantic regions, reaching upward to 24 hours. Additional milk volumes are expected over the coming weeks. This is causing some problems in hauling and finding available tankers. Some plants are absolutely not taking on any more milk. A few plants in the Midwest, although full, are taking milk if it is offered at steep discounts reaching $5.00 or higher. This could be common over the next month or more.

 

Projected milk production for 2012 was increased on the latest USDA World Agricultural Supply and Demand report. USDA raised its estimate by 400 million pounds to 201.1 billion pounds and the highest production ever. If realized, this would be an increase of 4.9 billion pounds, or 2.5% over 2011, and would be the greatest annual increase since 2006.

 

Despite anticipated high milk production, milk prices are expected to remain higher than one would think based on production growth. Yes, they certainly are not as good as last year and not as good as we would like to see, but the All-Milk price is anticipated to average $17.50, compared to $16.29 just two year ago. Milk production that year totaled 192.8 billion pounds. The Class III price is expected to average $16.35, compared to $14.41.

 

The big difference comes from the price of feed. Corn prices averaged $3.55 for the 2009-10 crop year, and they’re projected to average $6.20 for the 2011-12 year. Soybean prices were $9.59 two years ago; they’re estimated to average $12.25 this year. Soybean meal prices reached $311.27 per ton two years ago, and projected to rise to $345.00 per ton this year. This tightens and, in some cases eliminates, profitability.

 

Dairy exports for cheese and whey continue to do well increasing over last year but certainly not to the extent of the previous year. February exports of cheese and curd increased 4% over the previous year, totaling 20,611.1 metric tons. Whey exports increased 2.1%, totaling 34,024.2 metric tons. Butter recorded a large decrease, down 42.0% from the previous year to 3,748.3 metric tons. Despite Cooperatives Working Together’s assistance in the exports of 37.4 million pounds so far this year, international demand for U.S. butter is suffering.

 

Milk production is expected to remain strong unless some adverse weather takes place. USDA is leaving corn carryout unchanged from the March estimates. Its anticipation of 95.9 million acres of corn potentially means lower prices will materialize.

 

Actually, December corn futures have been working slowly lower since August. It has been so subtle that most have not realized it. Prices peaked on August 31 at $6.73 1/2 and have made lower highs on each price rally since then, with a current futures price of $5.30. This trend will continue lower barring any weather problems.

 

My recommendation is to purchase put options for those who have forward-contracted corn for this year. This will lower your purchase price if corn price continues to decline. If you have extra corn that you will need to sell, do the same thing to protect the value of your corn crop. You certainly do not want to sell that corn below your cost of production.

 

- Fonterra auction on April 17
- March Milk Production report on April 19
- May Federal Order Class I price on April 20
- March Cold Storage report on April 20
- Livestock Slaughter report on April 20
- Annual Livestock Slaughter report on April 23
- Commercial disappearance on April 24
- Dairy Products annual report on April 27
- Agricultural Price report on April 30

 

 

Fluid milk sales have been struggling for some time and are expected to continue to struggle with lower consumption nearly every month and nearly every year. Fluid milk sales for the two most recent months of December and January showed declines of 3.3% and 2.7%, respectively.

 

There have been efforts to improve consumption, but so far they have failed to improve overall trend. Much of it has to do with preference and stereotype. By and large, milk is viewed as a commodity that fits in certain times of the day and with certain diets. For instance, breakfast is generally considered a meal that includes milk, while most lunch and dinners do not.

 

Schools lunches are different in that milk is offered and consumed on a regular basis. Some school systems have discontinued offering chocolate milk with lunches, which has reduced consumption. This was done in the name of obesity. Take away the extra sugar and kids will lose weight. However, some have instead turned to other drinks that have higher sugar content than chocolate milk. Students have indicated less desire to consume regular milk.

 

Meals other than breakfast generally consist of other types of drinks. Most people do not view milk as a thirst quencher after a strenuous workout, sporting event or a period of hard work. I believe advertising has ingrained this in us. One of my local fast-food establishments offered milk as an alternative drink for some time but ended up dumping much of it due to lack of demand. Many consumers that eat at fast food restaurants purchase soft drinks. Next time you visit a fast-food place or even a regular restaurant, look around and see what people are drinking. There are very few, if any, glasses of milk.

 

Dairy Management Incorporated (DMI) has recently outlined several strategies to boost milk consumption. It is working with McDonalds to emphasis milk in children’s “Happy Meals.” They are investing $7 million each year for the next three years in lactose-free milk promotions, a $2 million investment in value-added milk and a $5 million investment to promote retail gallon containers of milk, according to Tom Gallagher, CEO of DMI.

 

There are no easy answers to declining milk sales. The bright spot is that the decline in consumption of fluid milk is being offset by increased cheese sales. Per capita consumption of cheese continues to increase nearly every year. Per capita consumption totaled 33.3 lb. in 2010. This was up from 29.8 lb. in 2000 and up from 27.6 lb. in 1985.

 

Despite increased cheese consumption, there is plenty to go around. Inventory has grown since the Whole Herd Buyout program in the mid-1980s. The latest USDA “Cold Storage” report showed total cheese stocks in February of 987.4 million pounds. Although 5% lower than a year ago, stocks are beginning to increase seasonally, increasing 1% over January.

 

Strong milk production continues due to mild weather and increasing cow numbers. February milk production was 4.3% higher in the nation after adjusted for leap day. Cow numbers increased 9,000 head from January and 87,000 more than last year. It seems as if hot weather may be the next event that could have a negative impact on production.

 

Feed prices may tighten profitability, resulting in decreased milk output, but that will take a little while to kick in. USDA released its “Prospective Plantings” report March 30, indicating farmers will plant 95.9 million acres of corn this year, 4.0 million more than last year and the larges acreage since 1937. Soybeans plantings are expected to total 73.9 million acres, down 1.1 million from lat year.

 

Trend-line corn yields would increase carryover significantly, resulting in a lower corn price but likely not for soybeans or soybean meal. The recent decline in the corn price factored into this report, providing some price stability. Purchase call options to protect your feed price while leaving the bottom open to take advantage of a lower price if it materializes.

 

- California Class 4a/4b prices on April 2
- Fonterra auction on April 3
- Dairy Products report on April 4
- World Agricultural Supply and Demand report on April 10
- Export statistics on April 12
- Fluid milk sales on April 13

 

January exports of dairy products were mixed. Fluid milk and cream exports declined 5.5 % from a year earlier. Some of this is due to economic situations and some is due to stronger milk production in other areas of the world.

 

Cheese exports increased 3%, totaling 19,415 metric tons. The percentage increase was not as high as it was last year. Nevertheless, it continues to show strength. Exports of dry whey increased 2.6% over last year totaling 38,298/mt. Exports are expected to continue to improve this year

 

Butter exports are the laggard. Exports have been running below year earlier levels since June 2011. January exports were down 27.4% to 3,003 metric tons. Despite increasing butter inventory, buyers have recently been aggressive filling orders for the Easter season. Low prices triggered interest to build inventory for anticipated higher prices as the year progresses. Butter futures suggest the price will continue to increase through November.

 

The Food and Agriculture Policy Research Institute (FAPRI) indicated in its latest baseline projections report that overall dairy prices and profitability would be lower this year than in 2011. “There is concern that demand won’t be quite as strong as earlier estimates and could push prices lower,” FAPRI said. “We do not expect, on average, for dairy producers to make great profits. But in any given year, there could be a very positive or very negative situation. That’s one of the many reasons why there’s been a push by Congress to try to make changes to dairy legislation that could smooth out some of those variations.”

 

Discussion is being held on the farm bill, with some thinking it could be done as early as June. However, it is very unlikely a revised farm bill would be done as early as June. The pattern has been that it is not settled until it absolutely needs to be, which is generally at the end of the year.

 

U.S. dairy farmers are not alone in dealing with lower milk prices. New Zealand's milk giant Fonterra Co-Operative Group Ltd., producer of about a third of the world's traded dairy products, forecast a lower payout to farmers for the season ending May 31. Fonterra said global uncertainty and concerns over China's economic outlook means dairy prices are likely to remain under pressure until at least mid-2012. One of the reasons cited was the news that China swung to a massive trade deficit in February.

 

Fluid milk sales have been slowing and continue to slow with January sales, down 2.7%. This is another month in the long line of months posting declines. One company is being innovative with its release of Cotton Candy milk. The company, Shatto Milk, based in Osborn, Mo., is releasing this flavored milk soon. It said, "We are extremely excited to offer our first limited release product. For years, customers have been requesting this unique flavor."

 

The company said the milk has a creamy base and tastes like a glass of melted cotton candy. I am not sure how appealing that will be to the general public. It will be interesting to see how well sales will fare during the limited release. Companies are experimenting with many flavors in the attempt to increase profits and improve demand. Jack-in-the-Box restaurants released a bacon-flavored shake as a limited release a few months ago.

 

Milk futures recently bounced over $1.00 per cwt after establishing a bottom in cheese prices. Current fundamentals do not look very promising for an extended rally in price. I recommend using fence positions consisting of purchasing at-the-money put options and selling call options $1.00-$1.50 above the market. Put options can be established in April and May for a reasonable cost. Cheese demand has slowed recently and is a concern in the industry.

 

Upcoming reports:
- Fonterra auction on March 20
- February Cold Storage report on March 22
- April Federal Order Class I price announcement on March 23
- February Livestock Slaughter report on March 23
- Commercial disappearance on March 27
- Agricultural Prices report on March 29
- March Federal Order class prices on March 30
- Prospective Plantings and Quarterly Grain Stocks reports on March 30

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.