Dairy market update, October 2013

Could the milk price outlook turn bearish despite record U.S. dairy product exports?

On Monday, Oct. 28, 2013 spot prices for cheddar cheese blocks and barrels at the Chicago Mercantile Exchange (CME) were $1.8750/lb. and $1.8200/lb., respectively. CME block and barrel cheese prices are up since late September (9/27/13) +$0.1250/lb. and +$0.1000/lb., respectively. During the same time period, butter is down to $1.4750/lb. (-$0.1350/lb.). The CME Class III futures averages (10/28/13) for 2013 was up to $17.91/cwt. (+$0.18/cwt.), the next 12mmonths was up to $17.28/cwt. (+$0.26/cwt.), and 2014 was up to $16.95/cwt. (+$0.19/cwt.). These Class III futures averages correspond to potential USDA Michigan mailbox prices of $18.92/cwt. (2013), $18.29/cwt. (next 12-months), and $17.96/cwt. (2014). Figure 1 shows the current (10/28/13) CME Class III futures averages for 2013, the next 12-months, and 2014 are at the 66th, 59th, and 53rd 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: Due to the “shutdown” of the federal government no USDA-NASS Milk Production Report was issued for September. September’s report is due for release 11/1/13. In August U.S. milk production rose 2.6 percent as compared with August 2012 which was above trend (+1.5 percent, 2007-2012). August production in Michigan increased 3.9 percent compared with August 2012. Due to “sequestration” budget cuts NASS did not report dairy cow numbers or milk per cow for August. The September USDA-NASS Livestock Slaughter Report was also cancelled and is due for release on 10/31/13. Thus, the most recent slaughter data showed August slaughter down 9,300 head as compared to August 2012. These numbers, coupled with healthier producer margins, make it very likely the U.S. dairy herd is growing. Average cull cow prices remained strong in September at $84.00/cwt. (+1.4 percent compared with September 2012). The USDA reports a decrease in dairy feed prices in September of 14.2 percent compared with September 2012. The September milk:feed ratio, at 1.86, was below 2.00 for the thirty second time in the past thirty four months, but the highest since November 2012.

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 (January-July) total commercial disappearance was down 0.2 percent. February-June total commercial disappearance was a dismal -1.3 percent below February-June 2012; however, July (+3.2 percent as compared with July 2012) set a new July record. The January-July disappearance of individual dairy product categories was: American cheese, +2.9 percent; other cheese, +1.7 percent; nonfat dry milk, -22.0 percent; butter, +0.5 percent; and fluid milk, -2.8 percent as compared with January-July 2012.

U.S. dairy trade has shown trade surpluses for forty three consecutive months. August U.S. dairy exports were valued at $614.0 million, an all-time August record, in excess of $600 million for three of the past four months, and up 41.8 percent from August 2012. August marked the twenty ninth month out of the past thirty in which exports exceeded $400 million and equaled an amazing 17.5 percent of total U.S. milk solids production. For CY-2013 (January-August) U.S. dairy exports accounted for 54 percent of nonfat dry milk/skim milk powder produced in the U.S., 6.1 percent of cheese, 8.6 percent of butter; 55 percent of dry whey, and 76 percent of lactose.

Dairy Product Inventories: The September edition of the USDA-NASS Cold Storage Report was also cancelled and is due for release on 10/31/13. The August report showed inventory increases for American cheese (+3.2 percent, 670.4 million pounds) and total cheese (+5.1 percent, 1,102.9 million pounds) as compared with August 2012. Both inventories were records for the month of August. August marked the ninth consecutive month total cheese inventory was above 1.0 billion pounds. August butter inventory was 33.5 percent above August 2012 at 268.5 million pounds, marking the twenty fifth consecutive month butter inventory was above the same month last year and set an all-time August record for butter inventory.

Outlook: Despite higher dairy prices, dairy market fundamentals are now showing some bearish signs. Due to favorable margins and high cull cow prices most experts agree that it is very likely U.S. dairy cow numbers are, or will be, growing as we move into 2014. Hopefully the October USDA Milk Production Report will give the industry a clue as to whether this assessment is true. Therefore, it is quite likely that U.S. milk production will begin increasing near, or even above, trend as we move into 2014.

Feed prices continue to decline which will inevitably result in even higher producer margins and increased incentive for higher milk output. CME corn futures are down about 18 percent lower since July and soybean meal prices are down about 8 percent. The local cash price for corn in Michigan is now below $4.00/bu. Even with $5.28/bu. corn in September’s milk:feed ratio, total feed costs and estimated margins were about 13-14 percent higher as compared to September 2012. The upward trend in milk output is likely to gain even more steam this winter as lower and lower feed prices filter back to farm level.

One major bit of data, the USDA-NASS Dairy Products Report, was released on 10/21/13 and was viewed as bearish by the industry. For example, for the first time since national records were kept (1950) cheddar cheese production was higher in August than in July with year-over-year production growth the highest since 2008. Fluid sales were reported down 3.6 percent for the 4-week period ending Sep 8th and 2.8 percent down year to date. This decline meant that ~625 M more pounds of milk were available for manufacturing purposes than last year.

The dairy processing industry is actively engaged in the fall holiday sales season and cheese processors are reported to be scrambling for limited milk supplies. Even though the most recent USDA Milk Production Report showed August milk output up 2.6 percent over last year, it should be remembered that milk output in August 2012 was down due to heat and drought. Opportunities for “mild” rallies in cheese, butter and Class III prices should arise over the next six to eight weeks. However, don’t expect miracles producing $20 Class III prices. Any rallies will certainly be short-lived as cheese and butter wholesalers are looking to replenish stocks on what they view as “pricing opportunities.” This may also introduce increased volatility in the markets as buyers and sellers jump in and out of the market. Inventories were at record levels for August, but should not be problematic especially if the 2013 holiday sales season experiences robust domestic dairy product sales.

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 near peak and forecasted milk production in Australia is 1-2 percent below last year and New Zealand is 4 percent above last year. It is reported that most of New Zealand’s milk production is being manufactured into powder with very limited cheese production. Therefore, experts expect hardly any New Zealand cheese available for export clearing the way for continued strong U.S. exports of cheese.

Most dairy analysts agree global dairy cupboards will likely not be refilled until at least Q1-2014, if then. The most recent Global Dairy Trade Auction (GDT) on 10/15/13 showed some weakening of international dairy product prices, however, they remain above U.S. domestic prices. U.S. dairy exports will likely remain very 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.

Producers should sharpen their pencils, calculate their latest cost of production and look for pricing opportunities for both milk and feed, according to Michigan State University Extension. Class III prices may strengthen on short term rallies as wholesalers fill and feed the retail dairy product pipeline for the fall holiday sales season. But, don’t expect miracles (e.g., $20 Class III) or any long term sustained rallies as we move into winter. Some bearish signs are on the horizon, but 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 new Farm Bill remains in a state of limbo. However, the bill has been referred to the conference committee of senate and house members. The conference committee has announced that the first public meeting on the bill will be held on 10/30/13.  For further information, there is a narrated PowerPoint based on this report and an October Commodity Market Update is also available.

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