Dairy Market Update, December 2013

Class III milk prices are likely to slip as the dairy product holiday sales season draws to a close.

Prices: On Monday, Dec. 16, 2013 spot prices for cheddar cheese blocks and barrels at the Chicago Mercantile Exchange (CME) were $1.9275/lb. and $1.8225/lb., respectively. CME block and barrel cheese prices are up since late November (11/25/13) +$0.0775/lb. and +$0.0750/lb., respectively. During the same time period, butter is down to $1.5500/lb. (-$0.1150/lb.). The CME Class III futures averages (12/16/13) for 2013 was up to $17.99/cwt. (+$0.06/cwt.), the next 12-months was up to $17.91/cwt. (+$0.58/cwt.), and 2014 was up to $17.65/cwt. (+$0.57/cwt.). These Class III futures averages correspond to potential USDA Michigan mailbox prices of $19.01/cwt. (2013), $18.92/cwt. (next 12-months), and $18.67/cwt. (2014). Figure 1 shows the current (12/16/13) CME Class III futures averages for 2013, the next 12-months, and 2014 are at the 66th, 65th, and 63rd percentiles, respectively.

cumulative probability graph

Figure 1: Cumulative probability graph of USDA announced Class III prices (2007-present) and current CME Class III futures averages.

Supply: The November USDA-NASS Milk Production Report showed Oct. U.S. milk production rose 1.0 percent nationwide compared with Oct. 2012 which was below trend (+1.5 percent, 2007-2012). Oct. milk production in Michigan increased 2.7 percent compared with Oct. 2012. Cow numbers on the report showed U.S. dairy cow numbers at 9,202,000 head, up 13,000 head from Oct. 2012. Milk per cow was up only 0.8 percent compared to Oct. 2012. The Oct. USDA-NASS Livestock Slaughter Report showed dairy cow slaughter down 8,600 head compared with Oct. 2012, but the national cull rate was 36.1 percent which was well-above the Oct. average (+5.7 percentage points). So far in 2013 (as of 12/05/13) 47,600 more dairy cows have been slaughtered than in 2012. Average cull cow prices remained strong in November at $80.50/cwt. (+4.6 percent compared with November 2012). The USDA reports a decrease in dairy feed prices in November of 22.7 percent compared with November 2012. The November milk:feed ratio, at 2.25, was above 2.00 for the second consecutive month and the highest since Oct., 2010.

Demand: Total commercial disappearance of dairy products for 2012 finished the year slightly below trend (+1.5 percent, 2007-2012) at +1.4 percent. So far for CY-2013 (Jan.-Sept.) total commercial disappearance was up 1.6 percent. Feb.-Aug. total commercial disappearance was only +0.1 percent as compared with the same period in 2012; however, Jan., June, July and Sept. set all-time records for those months. The Jan.-Sept. disappearance of individual dairy product categories was: American cheese, +4.9 percent; other cheese, +2.4 percent; nonfat dry milk, -15.8 percent; butter, +2.4 percent; and fluid milk, -2.3 percent as compared with Jan.-Sept. 2012.

U.S. dairy trade has shown trade surpluses for 45 consecutive months. Oct. U.S. dairy exports were valued at $622.0 million which was the seventh consecutive month U.S. dairy product exports exceeded $500 million. Oct. also marked the fourth time in the past six months in which exports exceeded $600 million and equaled 16.3 percent of total U.S. milk solids production. For CY-2013 (Jan.-Oct.) U.S. dairy exports accounted for 58 percent of nonfat dry milk/skim milk powder produced in the U.S., 6.1 percent of cheese, 10.1 percent of butter; 56 percent of dry whey, and 74 percent of lactose.

Dairy Product Inventories: The Oct. edition of the USDA-NASS Cold Storage Report showed inventory increases for American cheese (+3.0 percent, 629.2 million pounds) and total cheese (+2.9 percent, 1,024.2 million pounds) as compared with Oct. 2012. Oct. marked the tenth consecutive month total cheese inventory was above 1.0 billion pounds. Oct. butter inventory was 19.8 percent above Oct. 2012 at 173.8 million pounds, marking the twenty sixth consecutive month butter inventory was above the same month last year.

Outlook: Cheese prices have rallied as Christmas holiday sales near their end but butter is on a weakening trend as ample inventory is meeting holiday needs. Milk production remains below trend increases, however, slaughter rates appear to be declining as producer margins grow healthier and feed prices promise to go even lower. Look for producers to push to produce more milk and grow the national dairy herd as we move into 2014. It is also possible lower feed prices will push milk per cow upward to trend, or greater, increases. Look for Class III prices to falter as we move into the New Year with Class III futures in Q-2 2014 dipping to the low $16 mark and even perhaps below $16.

The window for short term rallies in cheese and Class III prices will close very soon as the final wholesale dairy product sales for Christmas are rapidly nearing their end. Producers should seriously consider covering a portion of their Q-1 and Q-2 2014 production now if they have not done much forward pricing as current pricing opportunities will quickly fade.

International dairy product prices remain above U.S. domestic prices as world demand for dairy products remains healthy. Demand has been particularly bolstered by increased demand from China and Russia. The Oceania 2013-2014 production season is now past peak and milk production in Australia is running 3-4 percent below last year and New Zealand is running approximately 6 percent above last year. It is reported that most of New Zealand’s milk production is being manufactured into powder with only limited cheese production. Therefore, experts expect hardly any New Zealand cheese available for export clearing the way for continued strong U.S. cheese exports. U.S. dairy exports will likely remain strong well into 2014 if not longer. In the longer term lower feed prices are likely to fuel increased milk production both here in the U.S. and in the major dairy exporting regions around the globe clouding the longer term U.S. dairy export outlook. Many export experts are confident 2014 U.S. export sales will remain robust, but are unlikely to top 2013.

Michigan State University Extension recommends that producers calculate their latest cost of production and take advantage of current pricing opportunities for both milk and feed. Class III prices are probably as strong as they will be for at least the next six months as Christmas holiday needs have peaked. Pricing some milk now for the Q-1 and Q-2 of 2014 is particularly important as Class III prices will likely drop close to, or even below, $16/cwt for that time period. Some bearish signs are on the horizon as U.S. dairy producers are likely to gear up production given more favorable profit margins. However, the strong export market should prevent any major crash of U.S. milk prices. Remember: marketing is first about price risk management and secondarily about profit enhancement. Work at increasing your overall average milk price rather than trying to hit the market high.

The 2008 Farm Bill has been extended to Jan. 31, 2014. A great gulf exists between the house version of the new Farm Bill and what the Senate will accept. Look for the possibility of acrimonious debate and further delay.

The Dec. USDA “Milk Supply and Demand Estimates” report forecasted 2014 milk production up slightly at 205.3 billion pounds (+1.8 percent vs. 2013) and forecasted fat basis commercial disappearance down at 197.8 billion pounds (+2.6 percent vs. 2013). Forecasted 2014 wholesale dairy product prices were mixed, but milk class prices were all up in the 2014 forecast for Dec.

This will be my final “Dairy Market Update” as I am retiring from MSU Extension. It has truly been a pleasure preparing this report every month and working with producers and others on agricultural marketing issues. My family and I are moving to back home to southern Indiana and wish all of you a safe and prosperous future!

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