Holding Strong: Dairy Price Expectations Continue to Improve

Published on: 11:14AM Jun 13, 2011

Tightness in the dairy market is expected to come from good demand, not from a reduction in milk production. This is good news. Improving both domestic and international demand makes for a stronger market that will hold prices higher for a longer time.

USDA made its usual and expected changes on last week’s World Agricultural Supply and Demand report for milk prices. Projected prices for cheese, butter, nonfat dry milk and whey were increased along with the All-Milk Class III and Class IV prices. These changes were expected, since USDA almost always increases its expectation for milk and product prices when cash prices and futures are increasing, and almost always lowers its expectations when prices are declining.

Last week, USDA increased the cheese price for this year by 8 cents to a projected average of $1.77 per pound. The price for 2012 was increased 6-1/2 cents to $1.71. Butter price was raised 7 cents to $1.9425, while next year’s projection was up only 1/2 cent to $1.6750. Nonfat dry milk price was increased 2-1/2 cents and is now expected to average $1.52 this year and $1.4050 next year. Dry whey was increased to $0.4750 this year and $0.4250 per lb. for 2012. Although all prices were increased, USDA expects 2012 prices to be lower compared to 2011.

Expected milk prices were increased as well, with the All-Milk price increased to $19.85 per cwt. for 2011 and $18.25 for 2012. Class III is anticipated to average $17.60 for 2011 and $16.50 for 2012. The Class IV price is projected at $19.20 this year and $17.05 next year. It appears the USDA feels Class IV will remain higher than Class III for the foreseeable future.

Interestingly, the expectation for milk production was increased to 195.5 billion pounds this year while 2012 production was decreased from the previous report to an expected 198.5 billion pounds. This leaves next year’s output at 3 billion pounds higher than this year.

According to this report, any tightness in the market will come from good demand and not from a reduction in milk production. This is good news, since we would rather have higher milk prices because of demand and not because of a reduction in milk production. Improving both domestic and international demand makes for a stronger market that will hold prices higher for a longer time.

Block cheese price has increased 42 cents since mid-May, moving to the highest level since June 2008. Buyers have been aggressive, with sellers holding back waiting for higher prices. Some have suggested prices have increased due to higher grain prices. However, this is not likely since milk production continues to increase each month. There was some impact from buyers looking for cheese due to the hold put on a significant volume of American cheese, for some reason turning buyers to other sources to cover needs. This cheese coming back to the market and the slowing of orders for replenishing aging programs could have a negative impact on prices in the near term. Last week, more cheese began trickling to the market as sellers took advantage of higher prices.

The more likely reason for the price increase is the desire for the industry to move Class III price closer to Class IV again, similar to what took place in March. This time, underlying fundamentals are a bit more supportive of higher cheese prices. This should keep the price spread between III and IV closer.

Cooperatives Working Together (CWT) voted last week to extend the program another two years beginning January 2012, providing a 70% participation of the nation’s milk supply level is reached. The current membership pledge is 68%. When this level is reached, the extension will be implemented. CWT no longer funds herd retirements but focuses on export assistance. So far this year, CWT has assisted in the export of 39.6 million lbs. of Cheddar, Monterey Jack and Gouda cheese.

Let’s all hope demand remains strong to keep milk prices higher, or at least keep pace with rising feed costs.

Upcoming reports:

- Fonterra auction on June 15
- July federal order Class I price on June 17
- May Milk Production report on June 17
- May Cold Storage report on June 22
- May Livestock Slaughter report on June 24
- Commercial disappearance report on June 28

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.