July’s Penn State Dairy Outlook

July 8, 2014 — Penn St. dairy economist James Dunn joined us on Tuesday’s DairyLine to share his latest dairy outlook. Here were some of the highlights:

Market Psychology

The prices of all dairy products have been mixed since last month. The CME block cheese price has fallen by 1.6% since mid-June, although it rose 4¢/lb. before dropping 7¢/lb. to $1.97. This lower cheese price of course is reflected in a lower June Class III price, which was well below the May Class III price, with July expected to be even lower.

CME butter prices are up 15.5¢/lb. in the past six weeks at $2.39/lb. The butter price rose through throughout the second half of June, peaking at $2.50/lb. on the 30th before slipping 11¢ in early July. Butter has had a variety of good news lately, including an article in Time magazine stating that doctors now consider butter to be healthier than margarine, plus the onset of summer has shifted cream to ice cream production. Butter inventories are well below the levels of recent years, with low stocks reflecting exports and the slow growth in milk production this year. The CME skim-milk powder price fell by a fraction of a cent per pound since the last report, as did dry whey. The net effect of these changes is that Class III futures fell and Class IV futures prices rose for June and July since the last report, but the futures prices for the rest of the year’s futures are lower.

The June Pennsylvania all-milk price was $1.10 lower than May at $25.10/cwt. Milk production is starting to overtake demand, but milk prices are lower for each successive month of 2014, so there are negative returns for holding inventories, which may be a factor in the very low stock levels. Ordinarily prices should rise after June to reward storing cheese and butter for the higher demand months late in the year. This year is the exception. The June Class III price was $1.21 lower than May at $21.36/cwt. The latest Class III futures price for July is $21.38. Average Class III futures prices for the remaining six months of 2014 are $2.06 above 2013 prices for the same months at $20.31.

The June Class IV price was up $0.48/cwt. from May at $23.13/cwt. The prices for Class IV futures average $21.36/cwt. for the rest of 2014, also up from last month. The Class IV futures prices for the rest of 2014 are expected to be higher than the same months in 2013. The forecast all-milk prices for the rest of 2014 average $23.85/cwt., or $1.88/cwt. above the same period of 2013. Milk production is expected to grow by more over the corresponding months in 2013 in response to better margins.

The U.S. dollar is about the same versus the Euro and Australian and New Zealand dollars since my last report. At this point, the dollar is up against the Australian dollar, down against New Zealand, and about the same against the Euro for the year overall.

Corn and Soybean Markets

Corn prices have fallen 8% since the last report, ending at $4.17/bu. for the July 2014 contract. It looks like growing conditions in the Midwest will produce a very large crop, despite some flooding in the western Corn Belt. China, Brazil, and Argentina are all expected to have good crops, with the Chinese crop predicted to be a record. Soybean prices are down 2.3% from last month, which seems like a muted response to the bean-crop forecasts, which are also for an excellent crop on more acreage than last year. The latest USDA soybean acreage forecast seems too low and the growing conditions look good. Soybean meal is down 0.9% from last month.

Income over Feed Costs (IOFC)

Penn State’s measure of income over feed costs fell by 4.3% in June, but IOFC is still well above last year, unusual values compared to recent years. This month’s decrease is 50¢/cow/day. The June value of $10.93/cow/day is $2.60/cow/day over the 2013 values for this measure. The milk price fell in June, but so did the feed costs, by 4%, with lower prices for soybean meal, corn, and hay. The cost of feeding a cow fell by 22¢/day to $5.38. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day.

The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. Like income over feed cost, this measure shows that the June PA milk margin was 4.3% lower than in May.

Milk Production

My June report was after the May milk production report, so there is no new news about this important measure since then.

A Longer-Run View: Ice Cream Demand

With summer now well underway, I have made a graph showing the per capita demand for hard ice cream compared to the price (Figure 2). As the figure shows, the per-capita demand for hard ice cream has declined steadily since 2000, while nominal prices have risen. There are several factors that may underlie this trend, but in any case it is not good news. The aging population, especially those of European origin, is probably a factor here. My cohort (the Baby Boomers) is now over 50 and may be substituting other lower calorie desserts for hard ice cream. Certainly there has been a proliferation of frozen yogurts and other substitutes. Another factor may be in response to the shrinkage of the standard container. I don’t remember when the half gallon container disappeared, but I personally didn’t like the switch to a smaller container while the price stayed about the same. Of course, the average family size continues to shrink so even the smaller container may be too large for what small family would want. If the effect of inflation is removed from the prices, in fact ice-cream prices have not risen, but I doubt many consumers are able to keep these changes in context. When real (deflated prices) are used, consumption dropped steadily despite no price increase, which is even more alarming than a response to higher prices.

 

Table 1. Milk Prices and Milk Futures Prices for 2013 and 2014(Based on futures prices of July 3, 2014) 2013 Class III 

 

Class IV 

 

PA All Milk 

 

2014 

 

Class III 

 

Class IV 

 

PA All Milk 

 

$/cwt 

 

$/cwt 

 

$/cwt 

 

$/cwt 

 

$/cwt 

 

$/cwt 

 

Jan 

 

$18.14 

 

$17.63 

 

$21.40 

 

Jan 

 

$21.15 

 

$22.29 

 

$24.90 

 

Feb 

 

$17.25 

 

$17.75 

 

$21.10 

 

Feb 

 

$23.35 

 

$23.46 

 

$ 25.90 

 

Mar 

 

$16.93 

 

$17.75 

 

$20.70 

 

Mar 

 

$23.33 

 

$23.66 

 

$ 26.70 

 

Apr 

 

$17.59 

 

$18.10 

 

$20.80 

 

Apr 

 

$24.31 

 

$23.34 

 

$ 26.80 

 

May 

 

$18.52 

 

$18.89 

 

$21.00 

 

May 

 

$22.57 

 

$22.65 

 

$ 26.20 

 

Jun 

 

$18.02 

 

$18.88 

 

$21.00 

 

Jun 

 

$21.36 

 

$23.13 

 

$ 25.10 

 

Jul 

 

$17.38 

 

$18.90 

 

$20.70 

 

Jul 

 

$21.38 

 

$23.16 

 

$ 25.20 

 

Aug 

 

$17.91 

 

$19.07 

 

$21.00 

 

Aug 

 

$20.58 

 

$22.46 

 

$ 24.47 

 

Sep 

 

$18.14 

 

$19.43 

 

$21.70 

 

Sep 

 

$20.32 

 

$21.72 

 

$ 24.01 

 

Oct 

 

$18.22 

 

$20.17 

 

$22.00 

 

Oct 

 

$20.25 

 

$20.74 

 

$ 23.55 

 

Nov 

 

$18.83 

 

$20.52 

 

$23.00 

 

Nov 

 

$19.81 

 

$20.29 

 

$ 23.12 

 

Dec 

 

$18.95 

 

$21.54 

 

$23.40 

 

Dec 

 

$19.50 

 

$19.77 

 

$ 22.73 

 

Annual 

 

$17.99 

 

$19.05 

 

$21.48 

 

Annual 

 

$21.49 

 

$22.22 

 

$24.89 

 

Annual change 

 

$ 0.55 

 

$ 3.05 

 

$ 1.45 

 

Annual change 

 

$ 3.50 

 

$ 3.17 

 

$ 3.41 

 

% change 

 

3.1% 

 

19.0% 

 

7.2% 

 

% change 

 

19.5% 

 

16.6% 

 

15.9% 

 

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