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Soft Landing Ahead for Dairy Prices but Favorable Dairy Margins Too

11:08AM Jul 17, 2014
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Decline in feed costs, strong exports favor U.S. dairies into the fall.

Dairy prices are headed for a soft landing, says a new report from the National Milk Producers Federation (NMPF). With a decline in feed costs, however, the report says dairy margins should remain favorable into the fall.

Milk and dairy product prices continue to decline from the record levels of a few months ago, NMPF says in its July 2014 "Dairy Market Report." But they remain at high levels by historical standards.

Growth in commercial use in domestic and export markets is still outpacing modest growth in milk production, although a buildup in cow numbers and faster growth in milk production is likely soon.

Recent USDA reports have largely convinced markets that grain stocks are more ample than expected, and very large harvests are likely this fall. These factors are putting downward pressure on feed prices. "All this suggests that milk-price-over-feed-cost margins for producers will remain favorable into the fall," NMPF says.

Dairy product highlights

• U.S. sales of all fluid milk products were 2.2% less during the first four months of this year than during the same period in 2013.
• Butter disappearance was 10% higher this year, driven by strong gains in both domestic and export sales.
• Cheese posted increased commercial disappearance during the first four months. Increased exports drove the gains for American cheese while other cheese use was up in both the domestic and export markets.
• Nonfat dry milk is a residual product in the U.S. market, so the 12% drop in total commercial disappearance during the first four months reflects greater demand, relative to supplies, for skim milk in other products as well as for export.
• The 4.7% increase in commercial disappearance of milk in all products significantly outpaced the increase in U.S. milk production over the same period, which kept milk prices at historically high levels.

Prices in June continued to ease back from the highs of a few months ago, NMPF says. The All-Milk price fell by almost $1 per cwt. from May but was still almost $4 per cwt, above a year ago.

"The CME dairy futures have been generally dropping in recent months, but they indicate the All-Milk price will remain above $22 per cwt. for several more months," notes NMPF's report.

Feed prices

The price of corn received by farmers, as reported by the National Agricultural Statistics Service (NASS), fell by $0.34 per bu. from May to June, reflecting a similar drop in corn futures contract average settlement prices over the same time. Corn futures prices have dropped in the wake of USDA reports showing larger-than-expected corn stocks and generally good growing conditions.

"This has raised expectations for record corn yields this fall and generated price projections around $4 per bu. for the crop year," NMPF says.

USDA also reported larger-than-expected stocks and planted acres of soybeans, which has generated continued pressure on soybean meal prices.

NASS reported a slight easing in June from May’s record farm price for alfalfa hay. These price reductions equate to a $0.52-per-cwt. reduction in the 2014 farm bill monthly feed cost formula price from May to June.

The farm bill monthly milk-price-over-feed-cost margin calculation for June was $0.38 per cwt. less than a month earlier. A $0.90-per-cwt. drop from May to June in the All-Milk price exceeded the smaller drop in monthly feed costs. The CME futures indicate the margin will move back up for July and August, with grain costs dropping as the harvest approaches.

For the Margin Protection Program (MPP) established in the new farm bill, the margin formula will be based on the two-month averages for January-February, March-April, May-June, July-August, September-October, and November-December.

For the bill’s Dairy Product Donation Program, the margin will be determined monthly. Final regulations for the MPP program are expected by the beginning of September.