By Ed Jesse, Emeritus Professor, Department of Agricultural and Applied Economics, University of Wisconsin-Madison.
Milk prices continue to show improvement. The October Class III price was announced at $12.82 per hundredweight, up $0.71 from September. While much lower than the October price of the last 2 years, this is $0.50 per hundredweight higher than October 2006. The October Wisconsin all-milk price was $14.40.
Class III milk prices are rising on the strength of wholesale markets for dairy products. November 9 closing CME prices were $1.57 per pound for block cheddar cheese (up $0.50 from early 2009 lows) and $1.525 per pound for butter (up $0.40). Reported NASS dry whey prices have more than doubled since January, with the latest report showing $0.34 per pound. Inserting these cheese, butter, and dry whey prices into the federal order Class III formula yields a Class III price of $14.40 per hundredweight, which is midway between yesterday’s CME Class III futures settlement prices for the November and December 2009 contracts. A Class III price of $14.40 would normally generate a Wisconsin all-milk price of about $16.00.
Through August, commercial disappearance of fluid milk products was up 1.3 percent from 2008. American cheese use was up 4 percent and other cheeses up 1.3 percent. Overall, commercial disappearance of dairy products for the first 7 months of 2009 was off 1.1 percent from last year. This decline is due to much smaller exports, especially of butter and nonfat dry milk. Domestic consumption has remained firm despite the faltering U.S. economy
Domestic consumption is being stimulated by lower retail prices for dairy products. The September 2009 CPI for all dairy products combined was 9.5 percent under September 2008, with fluid milk prices down 18.6 percent and cheese down 10.1 percent. The September CPI for meat, poultry, fish and eggs was down only 3.9 percent from last year and the CPI for all food showed no change. Consequently, cheese is a relatively inexpensive source of animal-based protein and dairy products in general are a comparative bargain at the grocery store.
While U.S, exports of most dairy products remain well under last year, international markets continue to heat up. Skim milk powder prices have risen nearly 50 percent since July 1, butter prices are up more than 60 percent, cheddar cheese up 35 percent and whey up 72 percent (Oceania sources except Europe for whey). World market prices for these products are all higher than U.S. wholesale prices, suggesting strong U.S. export incentives. The economies of developing country buyers of dairy products are improving rapidly from last year’s crash and credit is more readily available to importers, who are replenishing depleted pipeline stocks. U.S. dairy exports for the remainder of the year will exceed 2008 levels unless high prices drive away the new crop of buyers.
While most milk price indicators are positive, there are a couple of dark clouds that bear watching. One is large inventories for manufactured dairy products, especially cheese. Stocks of natural cheese (all private) were 970 million pounds in September, 136 million pounds more than last year. Cheese stocks have been higher than year-earlier levels since May 2008, and the difference has been growing (see chart below). Recent federal legislation authorized $60 million for government cheese purchases, but that will do little to pull down stocks, particularly when cheese production continues to outstrip consumption.
September butter stocks of 230 million pounds were 45 million pounds larger than last year. But butter production has been running well below last year, which is drawing down stocks. Total stocks of nonfat dry milk in September were more than double last year, but private stocks were under September 2008. Government stocks were down 50 million pounds from July due to special stock-reduction programs. Anticipated larger exports of milk powder should keep inventories at manageable levels.
A second dark cloud is feed costs. USDA’s estimate of the cost of 16 percent protein dairy ration fell from $7.80 per hundredweight in June to $6.51 in September, but jumped to $6.76 last month. Further increases could come from corn and soybean harvest delays and related quality problems—corn and bean futures prices have not spiked but seem uneasy. As of November 1, a record low 25 percent of the U.S. corn crop had been harvested. This compares to 53 percent in 2008 and the previous record of 44 percent set in 1992. The national bean harvest was at 51 percent on November 1 compared to 85 percent last year and the slowest rate of harvest since 1984. Wisconsin corn and bean harvests on November 1 were at 13 and 29 percent completed, respectively. Last year’s numbers were 41 and 92 percent. For Wisconsin dairy farmers growing corn in lieu of buying it, coping with molds could add significantly to feed costs.
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