Dairy Market Update, June 2011
Dairy market fundamentals and prices remain seasonally strong, but risk remains in the market.
Prices: On Friday, June 17, 2011 spot prices for cheddar cheese blocks and barrels at the Chicago Mercantile Exchange (CME) settled at $2.1200/lb and $2.0675/lb, respectively. CME cheese prices are up sharply since mid-May (5/18/11) with blocks up $0.4525/lb and barrels up $0.4050/lb. During the same time period, CME spot butter price increased (+$0.0700/lb) to $2.1400/lb. CME Class III futures averages for 2011, the next 12 months and 2012 were $17.68/cwt, $17.70/cwt and $16.49/cwt, respectively. These Class III futures averages would correspond to potential USDA Michigan mailbox prices for 2011, the next 12 months and 2012 of $18.69/cwt, $18.67/cwt and $17.48/cwt, respectively. Figure 1 is a cumulative probability distribution of all USDA BFP/Class III monthly prices from 1995-present. The figure shows the current (6/17/11) CME Class III futures averages for 2011, the next 12 months and 2012 are at the 92nd, 92nd and 86th percentiles, respectively.
Figure 1: Cumulative distribution graph of USDA announced monthly BFP/Class III prices and current CME averages (1995-present)
Supply: In May, U.S. milk production increased below trend (+1.6%, 1995-2011) at +1.3% versus May 2010. May was the second consecutive month milk production grew below trend increase. May production in Michigan was up versus May 2010 by only +0.3%. The size of the U.S. dairy herd grew by 13,000 head from April to May, and was up 81,000 head versus May 2010. Dairy cow slaughter numbers in 2011 continue to run well ahead of last year, up 86,300 head compared to the same time last year (through 5/28/11). Average U.S. cull cow prices hit an amazing $79.10/cwt in May (+34.1% compared to May 2010). Milk production per cow from January through April was slightly below trend increase. The USDA reported an over 61% increase in dairy feed prices in May versus May 2010; however, income over feed costs were up 11.7% (+$0.74/cwt) due to an increase of $4.40/cwt in the “All-milk” price.
Demand:The USDA reports total commercial disappearance in 2010 increased 3.1% over 2009, well-above the 1995-2009 average increase (+1.6%). All categories of wholesale dairy products showed above trend increases in disappearance for 2010 except fluid milk products. Total commercial disappearance remains strong in 2011, up 3.6% through March. Through March, disappearance of individual product categories was: American cheese, +6.0%; other cheese, +7.3%; nonfat dry milk, +0.9%; butter, +8.1%; and fluid milk, -1.0%. U.S. dairy exports for 2010 totaled $3.71 billion in value, up 63% from 2009. U.S. dairy exports in 2010 represented a record 12.8% of total U.S. milk production on a total solids basis. Dairy imports in 2010 were the lowest since 1997. U.S. dairy exports continue strong in 2011 with January, February and March 2011 totaling $335 million, $348 million and $421 million; +49%, +55% and +48% versus January, February and March 2010. January through March exports were equivalent to 13.2% of total U.S. milk solids production, while imports were equivalent to only 2.8% (very near record lows). So far in FY-2011 (Oct-Mar) U.S. dairy exports are valued at $2.114 billion (+48% versus FY-2010) with a dairy trade surplus of $659 million.
Dairy Product Inventories: The latest USDA Cold Storage Report showed inventory increases in April for American cheese (+2.3% at 623.4 million lbs.) and total cheese (+2.2% at 1,041.0 million lbs.) compared to April 2010. Both cheese inventories set all-time April highs. However, April butter inventory was 31.5% below April 2010, marking the sixteenth consecutive month butter inventory has been below the same month last year. Butter inventory declined March to April for the first time since 2004.
Outlook: Wholesale dairy product prices have shown tremendous strength over the past month, and are well-above historical averages for this time of year. Chicago Mercantile Exchange (CME) Class III futures prices remain very strong. In fact, the 2011, next 12 months and 2012 average prices have strengthened +$0.51/cwt, +$0.64/cwt, and +$0.29/cwt, respectively. The spring flush of milk production is winding down and warmer summer weather will mean lower milk component levels which decrease manufactured product yields. This is counter-balanced, somewhat, as schools are closed for summer break, decreasing fluid milk needs and releasing more milk to manufacturing plants. Due to very high feed prices, margins are slim for dairy producers and milk per cow should continue to grow at below trend rate. These facts, coupled with record high cull cow prices, should keep cull rates well above historical averages and keep national milk production from getting ahead of commercial disappearance. However, current wholesale dairy product prices are very high which may cut into record dairy product exports. In order to maintain the current strength in dairy product prices, it is critical to maintain our strong export market. The strength of domestic commercial disappearance in the summer is highly dependent on America having a strong vacation season. There is concern that this year’s summer vacation season will be weak due to high gasoline prices, high unemployment and low consumer confidence.