Low Milk Prices Continue

May 10, 2009 07:00 PM

By Robin Schmahl

Spring flush is known for higher milk production along with its lowering effects on milk price. This time period tends to have the lowest milk prices of the year.  Production increases seasonally across the nation stretching manufacturing capacity. Schools and universities close for the summer diverting more milk to manufacturing. However, this year the milk price is visiting support prices and below for the second time.

Cheese prices were below support for most of January pulling the February's Class III price down to $9.31. It was welcomed to see improved prices in March and April, but cheese prices have since declined. The current block price is near support while barrels are below, which has brought the May Class III futures contract price down to $9.80. By the end of this week the May price will be set for all practical purposes. The trade will have calculated the weekly cash trading as well as the NASS prices. Generally, the final two weeks of the month experience little price movement in the contract as the trade switches to the next month. Even if there is significant price movement in the underlying cash markets, it will not impact the milk prices for May.

The MILC payments have been helping to provide a little extra income, but they take a while to receive. The Class I price sets the first MILC calculation while USDA's "Agricultural Prices” report sets the feed cost calculation, which releases the revised figures a month and a half after the Class I price. By no means are these MILC payments putting income above cost of production in most cases. There have been some projections released that indicate there will be an MILC payment for every month this year.

Stronger prices seen in butter, nonfat dry milk, and dry whey add a silver lining to the dark clouds. Butter price has been increasing since late February and is currently at the highest price since early December. A one cent increase in butter translates into nearly a one half cent move in the Class III price. The increase in butter price has added six cents per cwt to the base price. Weekly nonfat dry milk prices have increased nearly two cents over the past two months. This price does not impact the calculation for Class III, but does impact Class IV. Each one cent increase in nonfat dry milk translates into an increase of nine cents to the Class IV price. Dry whey has been slowly increasing since mid-February, gaining 5.3 cents per pound adding nearly 32 cents per cwt to the Class III price.

There is some anticipation of significantly higher milk prices later this year, but the current fourth quarter futures suggests a monthly average cheese price of $1.55, a butter price of $1.65 and whey at $0.30. Cheese has the potential to increase to $1.55 or above, but it may be difficult for whey to average $0.30 for an entire month. For a Class III price to achieve or exceed $17.00, as has been suggested, would require a monthly average cheese price of $1.80 (depending on the butter and whey price). This is unlikely given the current economic situation and world prices. I dare say those promoting milk prices that are high or higher later this year may be doing a disservice to farmers. Be careful not to forego any opportunities to hedge milk production on a price bounce that would put your milk price above your cost of production.

I am not currently recommending anything in milk, but will take advantage of a futures price increase if one were to develop. The last price bounce that pushed Class III futures $2.00 higher was a gift and allowed for hedges to be placed. Another bounce of $1.00 should be taken advantage of to hedge production or extend coverage.

Upcoming reports to watch for are the April Monthly Milk Production report on May 18; the June advanced Class I price on May 22; the April Livestock Slaughter report on May 22; and the April Monthly Cold Storage report on May 22.

--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 Web site 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 may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.



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