The Future Is Looking Brighter

Published on: 13:40PM Jan 10, 2011

The dairy price outlook for the year has improved significantly over the past few weeks. It is about time, since higher feed prices will have a definite impact on profitability.

 

The milk price potential for 2011 has improved substantially since Christmas. Dairy futures have shown dramatically higher prices as a result of the strength in underlying cash markets and higher international dairy prices. In the past week, July through October Class III futures contracts exceeded $16.00 for the first time in the life of these contracts.

The futures price increases were fueled mainly by the increases in butter and nonfat dry milk prices on the spot market and a jump in international price in the latest Fonterra auction.

Last week alone, the butter price jumped 43 cents to $2.10. Buyers became aggressive and bid higher in the attempt to get the needed supply. It is questionable whether this price can be sustained as exporters and retailers assess the effect of this price increase on demand. Historically, a price increase of this magnitude over a few days’ period of time results in a quick retracement of some of the gain. Buyers were attempting to build some inventory as churning activity increased through the end of 2010, but have now put that on hold as they decide how to proceed due to the price increase.

Nonfat dry milk prices were not left behind, with Extra Grade increasing 11.5 cents last week to $1.34 and Grade A increasing 6 cents to $1.33. These are the highest prices since May 18, 2010, and gains seemed to be a direct result of the increase in price on the bi-monthly Fonterra auction.

The latest Fonterra auction held on Jan. 4 resulted in increased prices across the board. The Whole Milk Powder price increased 3.8%, Skim Milk Powder increased 10.9% and Anhydrous Milk Fat increased 10.6% to a new record high. Buttermilk Powder increased a whopping 20.6%. Demand is strong and current supply somewhat limited.

The laggard right now is cheese with the price so far showing only a limited increase. Cheese production increased over the holidays allowing more to be available to the market, with sellers not shy about offering it to the spot market. Over the past few weeks a significant amount of cheese has been traded on the spot market. This is interesting, given the fact that sellers many times step back once buyers become more aggressive, but so far they have not.

Some of this may be due to the large cheese inventory and continued strong production so far. Even with significantly higher grain prices and the milk/feed ratio narrowing substantially, USDA is projecting milk production for 2011 at 195.5 billion lbs. or 2.7% above 2010. How this will all play out as the year progresses is anyone’s guess.

Exports will be a big factor this year. The first 10 months of 2010 showed exports of cheese up an average of 62.0% over last year, with butter and butterfat exports up nearly 250.0%. Of course, this is compared to a significant slowdown in 2009, so we cannot expect the same or similar growth in 2011.

In fact, USDA estimates cheese exports this year to be slightly lower than last year, since both the European Union and Oceania are expected to increase cheese production, according to their recently released World Dairy Situation and Outlook report. Butter exports are expected to remain strong, but butterfat exports from the EU are expected to jump 18% as a result of expected production increases.

The dairy price outlook for the year has improved significantly over the past few weeks. It is about time, since higher feed prices will have a definite impact on profitability. The tight milk/feed ratio will keep expansions on hold. Higher Class III futures could potentially keep production strong as farmers push production in order to take advantage of the higher prices, if they materialize. This has been the pattern and not expected to change anytime soon. All in all, milk prices are looking up for the year.

Upcoming reports:

- The World Agricultural Supply and Demand report on Jan. 12
- Quarterly Stocks report on Jan. 12
- Fonterra auction on Jan. 18
- December Milk Production report on Jan. 19
- December Livestock Slaughter on Jan. 21
- February Advanced Class I price on Jan. 21
- December Cold Storage report on Jan. 21


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.