Milk Prices Poised to Climb?

January 18, 2013 06:02 AM
Milk Prices Poised to Climb?

USDA raises estimates for dairy prices amid strong demand, but some foresee even higher levels ahead.

Corn isn’t the only agricultural commodity with a bullish price outlook.

Milk prices are poised to climb this year, despite having slipped in recent months, industry analysts say.

USDA projects Class III prices to reach $17.65 to $18.45 per cwt. in 2013 – as much as $1 per cwt. above the $17.44 average it estimates was achieved in 2012. Yet some market analysts, like Dr. Mark Stephenson, dairy economist with the University of Wisconsin, believe dairy prices could rise even higher, particularly in the second half of 2013.

In fact, Stephenson says he’s mystified by USDA’s tempered price outlook as well as by the recent decline in nearby milk futures. Prices for Class III futures have been tumbling since about mid-October, when they traded around $19 per cwt. They’ve since dropped to the $17.50 to $18 range. Stephenson believes the Class III outlook is for at least $1 per cwt. above those levels.

"There’s been no obvious pullback in demand," he says. "We’re looking at short, or at least flat, milk production in the U.S. this year. If demand for exports holds and the domestic market grows, then all of a sudden milk supplies will be tight."

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In its Jan. 11 World Agricultural Supply and Demand Estimates (WASDE) report, USDA predicted 2013 U.S. milk production at 199.9 billion pounds, down slightly from the 200 billion pounds it now believes dairies churned out in 2012. USDA also foresees strong demand both in U.S. markets and abroad, with robust export sales of cheese, nonfat dry milk and whey.

"We don’t have a lot of extra product in storage," says Stephenson. "Cheese, whey, nonfat dry milk and butter – none are at burdensome levels."

Robin Schmahl, trading expert with AgDairy LLC, agrees with Stephenson that milk prices could easily reach above USDA’s projections. Schmahl foresees Class III prices averaging at $18.50 this year.

Still, even with higher milk prices, profit margins for dairies could continue to erode as record-high feed prices linger. Corn futures leaped higher after USDA’s Jan. 11 reports, which projected sharply reduced stocks by season’s end on Aug. 31. "While stiff competition has limited U.S. corn exports," USDA noted, "higher domestic disappearance leaves the balance sheet historically tight and is expected to support strong and volatile prices well into summer, particularly in the domestic cash markets." In its WASDE report, USDA forecast the price range for corn at $6.80 to $8 per bu.

That doesn’t help the livestock producers who feed the yellow-eared crop to their cows, hogs and chickens. Since last week, the nearby months for corn futures have risen some 30 cents per bu., to the $7.25 per bu. range. Old-crop corn prices are likely to remain there or higher, at least until July, when weather and new-crop harvest paint a clearer picture of corn supplies.

In the meantime, underlying fundamentals indicate positive territory ahead for dairy prices.

"The issues of strong U.S. demand, questionable milk production growth and a pervasive lack of capital investment in the dairy industry are real issues facing the dairy industry in 2013," says Dave Kurzawski, a senior broker with the trading firm of INTL FC Stone. "Remember, when we merge a dwindling milk supply with a growing hunger for dairy products, the risk for dairy prices is not down — but up."

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