The Class III price in August was $1.67 higher than in July, while the Class IV price was down $0.19. This separation of the Class III and Class IV markets has persisted for several weeks, as cheese markets are doing better than butter-powder markets. Reflecting this, the butter and powder prices are down by 2.4% and 3.8% respectively, while cheese and whey prices are 13% and 16% higher. Cheese prices are apparently reflecting strong domestic demand, although the export markets are still limited by the strong dollar and substantial worldwide inventories. Butter stocks are well above last year, and with the strong dollar and accumulating inventories in Europe, we may see increased butter imports once again in the autumn. Exporting butter in this market will be a challenge. California’s milk production continues to lag behind below a year ago, with the continuing drought and extreme heat. U.S. milk production in July was up by 1.4% over last July. Since last month the Euro has recovered 1.5% relative to the greenback while the Australian dollar is up by 0.9% and the New Zealand dollar is up by 4.2%. In total these changes in currency values improve U.S. competitiveness in export markets. Nevertheless dairy exports are far below 2014 levels and somewhat below 2015, although improving despite the strong dollar. Cheese futures prices have fallen by 1.7% in the last month for the 2016 contracts. Butter futures have fallen in recent weeks about 15¢/lb., giving back increases from a month ago. Nevertheless world inventories are high and the dollar is still expensive relative to the other exporters. China should be importing more, given their milk production, but this increase is slow to arrive. Table 1 shows recent dairy class prices, plus the futures prices for the remainder of 2016 and first half of 2017. Class III, and to a lesser extent Class IV prices, are expected to be higher over the remainder of 2016, and the futures prices are about the same this fall as for the first half of 2017. My estimates for the Pennsylvania All Milk Price for the rest of 2016 show it averaging $3.00 per cwt. more than for January-July. In much of Pennsylvania and especially upstate New York, the latest Drought Monitor shows the drought is continuing. Although it is hard to generalize from individual farm results, early harvest results in much of Pennsylvania are disappointing for hay and corn silage. This of course will hurt net dairy income. Besides the Northeast and the continuing extreme drought in California, the nation’s crop weather is generally okay. The long-term issues depressing the dairy economy are still the strong dollar, the Russian embargo on EU dairy imports, and China’s economy. Overall the outlook for milk prices for the rest of 2016 is much better than the first half, as it is for the first half of 2017. Corn and Soybean Markets Corn and soybean meal prices are down 2.5% and 6.6% in the past month, and soybean prices are down 6.6% as well. The U.S. corn and soybean crops will be records as Corn Belt weather has been almost ideal. Exports of corn and beans are lagging estimates, undoubtedly reflecting the strong dollar. Income over Feed Costs (IOFC) Penn State’s measure of income over feed costs rose by 24% in August from its July value, as much higher milk prices combined with somewhat lower feed prices. Figure 1 shows how these values compare to recent years. August’s income over feed cost is the highest since November 2014. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Table 2 shows the monthly data for the past 18 months. The allocation of the revenue per hundred pounds of milk (milk margin) is shown in Table 3. The milk margin is the estimated amount of the Pennsylvania all milk price that remains after the feed costs per hundredweight of milk production are paid. Like income over feed cost, this measure shows that the August PA milk margin was 24% higher than in July. For both measures the estimated price may be overly optimistic, but in any case the profitability of dairy production in Pennsylvania is improving.
If the Pennsylvania drought hits farmers hard, which it will for some, then the feed cost using market prices will understate the impact as farmers spent money to produce feed and then must spend more money to replace crops lost to drought. Milk Production The latest U.S. milk production report showed July milk production up 1.4% from a year earlier on a 30-day month basis (Figure 2). Although not a large increase, this milk production increase is problematic in the current dairy environment, since the export market is tight, given the strong dollar, and there is plenty of milk available from other exporters with weaker currencies. As is seen in Figure 3, cow numbers continue to grow very slowly and increased by only 0.19% over last year. Although this increase is very small, more milk production nationally will restric reaching higher milk prices.
Source: Penn State
