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Milk Prices Range-bound Despite Weakness

Published on: 17:32PM Aug 31, 2015

It has been a somewhat unusual year so far with underlying cheese prices moving within a range $1.47 and $1.70 for blocks and $1.7550 and $1.45 for barrels. It is not unusual for prices to remain in a range, but it has been unusual for it to remain in this 33-35 cent range for this duration. It does not look like it will break out of this range for the next two months either. Class III milk price so far has been confined to a range of $1.26 with Class IV having a range of 75 cents since January. So why has Class III price not been able to show a greater price range? The answer lies in the weakness of dry whey price.

 

Since the beginning of the year, dry whey price was nearly 59 cents per pound. The latest Agricultural Marketing Service (AMS) weekly price average was just shy of 30 cents. The last time whey price was this low was the week of September 12, 2009. The decrease of 29 cents for whey since the beginning of the year translates into a price reduction of $1.74 of Class III price. However, Class III price is currently not $1.74 below the January price due to the averaging of 4 weeks of AMS pricing in order to establish class prices. The whey prices previously stated for the beginning of the year and the most recent price is for a one week period. Butter price also has an influence on Class III price and current price offsets some of the loss in pricing of dry whey. Thus, Class III price has been in the narrow range.

 

Class IV being in a similar situation has experienced a decline of nonfat dry milk price of 40 cents since the beginning of the year. Each penny movement in nonfat is about an 8 cents move in Class IV resulting in a $3.20 decline. However, the strong butter price has offset the weakness of nonfat keeping Class IV prices within the range. The strong butter price has been very important to overall milk pricing and we certainly hope is stays that way until dry whey and nonfat dry milk price increase.

 

The problem that may delay the increasing nonfat dry milk price is that the world market is virtually “awash” in milk powder supply. This is the reason world price and U.S. price is low. The Russian ban on dairy products from the European Union and the substantial decline of purchasing from China has resulted in a backup of supply. The first half of the year has resulted in a 56% decline of the purchase of whole milk powder from China alone according to the U.S. Dairy Export Council. U.S. inventory of nonfat dry milk has increased to record levels. Even though there has been good movement of Grade A nonfat dry milk for weeks on the daily spot market due to low price, supply continues to grow. This dims the outlook for milk prices for the rest of this year and potentially much of next year unless supply of both nonfat dry milk and dry whey decline substantially and price begins to improve.

 

Market fundamentals can change rather quickly, but it make take a while to turn the current trend. The latest Global Dairy Trade action might have indicated world prices may have reached a bottom and that there may be light at the end of the tunnel. Time will tell whether price lows have been established and higher milk prices may be forthcoming.

 

Upcoming reports:

 

-August Federal Order class price on September 2

-August Dairy Products report on September 3

-World Agricultural Supply and Demand report on September 11

 

 

 

 


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.

 

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