Farming through Difficult Times

By Ed Jesse, Emeritus Professor, Department of Agricultural and Applied Economics, University of Wisconsin-Madison.

The August Class III price came in at $11.20, $1.23 per hundredweight above July and the highest yet for 2009. The good news is that prices are higher. The bad news is that they have a long ways to go to stem the flow of red ink on Wisconsin dairy farms.

Class III futures prices for the remainder of 2009 were showing encouraging strength last month as CME cheese prices hit 2009 highs of $1.40 for blocks and $1.38 for barrels. This pushed September through December Class III contracts to between $13 and $14. But cheese prices skidded early this month, dropping Class III futures for the rest of the year by about $1/hundredweight.

Current CME cheese prices (September 8 ) are 3-4 cents under the temporarily-elevated CCC purchase prices of $1.31 for blocks and $1.28 for barrels. These are rock-bottom prices in the sense that it costs 3-5 cents per pound more to sell cheese to the CCC than to commercial buyers — CME cheese traders know that prices any lower will induce government sales, shortening up the available supply of “young” cheddar.

Why did cheese prices collapse? Two reasons: First, the July milk production report released mid-August showed no change in total U.S. milk production over last year. Second, the late August release of July 31 cheese inventories showed total natural cheese stocks at a record high 982.5 million pounds, 80 million pounds (9 percent) higher than last year. Based on this information, cheese buyers lowered offers on the CNE, apparently confident that there was plenty of cheese to meet their current needs and that there would be plenty more to come.

So what can we expect for the rest of the year? Early September events were a setback to a developing trend of increasing milk prices. But there are several signs that the setback is temporary and will be short-lived:

• Retail dairy product prices are falling further and further below last year’s level. After starting the year above 2008, the July CPI for cheese at 200 was 20 points under July 2008. Grocery store cheese specials are becoming more common. Similarly, the July CPI for fluid milk was down 28 points and butter was down 15 points. Fluid milk and butter are being featured more often as loss leaders.

• Commercial use of dairy products is responding positively to these lower prices. From February through June, commercial disappearance of American cheese varieties was up 6 percent over 2008. Disappearance of varieties other than American was up only about 1 percent for the same period, but June showed a gain of more than 3 percent. Fluid use continues to run ahead of last year. Butter use still trails 2008 because of sharply reduced exports and a cutback in away from home eating at up-scale restaurants.

• The international picture is brightening considerably.  Prices for all major traded commodities are up 13-50 percent from early spring troughs (see table below).  Latest reported world prices for skim milk powder (aka nonfat dry milk, although the two products are not identical) and whey are above domestic prices as reported by NASS. This is promising for expanded U.S. exports and higher export earnings. Fonterra’s last two whole milk powder (WMP) auctions (for October and November delivery) have yielded price increases of 26 and 24 percent, indicating continued world price strength in milk powders, a big U.S. export item.

Source: USDA as reported in Understanding Dairy Markets (http://future.aae.wisc.edu)

• Milk production will fall through the rest of the year. July milk production was a fluke resulting mainly from higher milk yields per cow due to ideal weather and excellent quality forages in the Midwest. Supply will adjust; it’s just taking longer than we expected.