USDA Estimates Higher Milk Production and Lower Prices
May 16, 2011
Dairy markets remain active with good demand, but strong grain prices, along with questions about hay availability and the weather, will have a bearing on the milk/feed ratio.
Much of the excitement in the markets over the past few weeks has taken place in cash butter and nonfat dry milk.
Butter staged a rally and tried to remain above $2.00 as buyers were aggressively procuring supply for future needs. However, once price reached $2.10, buyers said enough is enough and stepped back. This then caused sellers to become the aggressive ones wanting to move product rather than hold on to it. Price quickly fell below $2.00 again solidifying the sideways trading pattern likely to be maintained for the foreseeable future.
Churning has been active, but manufacturers are attempting to keep on-hand supply limited. There is little interest in speculating by holding supply for higher prices. Ice cream production is increasing, but cooler weather has been a limiting factor allowing more cream to be available for churning. Supply and demand seems to be balanced despite higher exports. In fact, butter and milkfat export sales in March was 102% higher than the same month a year earlier and up 30% from the previous month.
Lest we get too excited and wonder why price is not significantly higher, we need to look back at last year. The average butter price during March 2010 was $1.45, while the average this year was $2.06. So, this is already factored in and despite good demand, prices are remaining in a range. It is possible this price range may hold for the rest of this year as stocks are slowly building and orders are being filled.
Nonfat dry milk price moved lower over the past weeks. There had been a large price spread of 20 cents between Extra Grade and Grade A for a time. However, rather than Grade A moving up in price, Extra Grade finally fell and fell quickly. Current prices on the CME Group cash markets are virtually in line with regional prices rather than having the disconnect seen previously. The main reason Extra Grade price remained at $1.80 for awhile was due to no interest in trading on the daily spot market. But eventually something had to give. Exports for the month of March were 46% higher than a year earlier.
USDA released its first estimate for 2012 milk production last week in its monthly World Supply and Demand report. Its current estimate is for production to reach 198.7 billion pounds, up 3.3 billion pounds from the estimate for this year. Even though grain prices are expected to remain high, milk per cow is expected to increase.
Interestingly enough, milk prices are estimated to be lower next year. Class III price is expected to range between $15.35-$16.35 per cwt., a decrease of nearly a dollar from this year. The Class IV price is estimated between $16.30-$17.40 per cwt., a decrease of nearly $2.00 with the all-milk price between $17.35-$18.35 per cwt., a decrease of around a dollar per cwt.
It had been anticipated this year that milk prices would move significantly higher due to strong grain prices. March did reach $19.40 per cwt. and likely the highest price of the year. Milk production continues to increase despite higher grain prices. Farmers are able to cash-flow at these higher feed prices. They’ll continue to do so unless delayed planting weather and adverse growing weather push grain prices significantly higher than they already are. USDA did release its estimate for 2012 corn ending stocks at 900 million bushels. This keeps a tight stocks-to-use ratio and remains below the magic billion-bushel carryout number. Soybean ending stocks are expected to be 160 million bushels – comfortable but still tight.
A major concern this year is going to be hay availability and price. Acres of hay were to be plowed out or planted with corn to take advantage of the higher price. Wet weather may have changed some of this, but hay prices are expected to increase substantially this year. This will definitely have an impact on the milk/feed ratio. Weather is the ultimate card that will be played affecting milk price.
- Fonterra auction on May 17
- April Milk Production report on May 18
- June federal order Class I price on May 20
- April livestock slaughter report on May 20
- April Cold Storage report on May 20
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.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.