Dr. Cameron Thraen, Milk Marketing Specialist, The Ohio State University (top of page)
Market Watch
For dairy farmers, the milk price has been outstanding over the past 12 months. Will this price strength continue into 2008? To address his question, we will look to the futures market for some guidance. The included figure shows the Chicago Mercantile Exchange (CME) Class 3 futures price for each month in 2008. You can also find the premium or discount relative to the average announced Class 3 price for each of the months in 2008. The average is calculated for alternative time intervals starting with 3 years and ending with 14 years of Class 3 prices.
The January announced Class 3 price will be very near $19.35/cwt. The CME futures market is expecting a significant decline from this price to the February price of $16.95/cwt. The forecast prices for all of 2008 are in the range of $16.13/cwt for a low in May to the highs of $16.95/cwt for both February and March 2008. The premiums captured in this market are significant even for the 3 year average 2005 to 2007. These premiums hold well throughout the first quarter of 2008 and then fall off for the rest of the year.
The CME futures market is currently expecting a Class 3 price to average $16.66/cwt for all of 2008, with the near six-month price a bit higher at $16.99/cwt. The final six months will be down to an average of $16.33/cwt, which is excellent, if it were not for forecasts of $5/bu plus corn and $300/ton plus soybean meal prices for 2008. Increased cost of production will certainly eat into what otherwise would be excellent cash returns. You can find this chart at my Ohio Dairy Web 2008 website which is listed below. The chart is updated daily after the markets close.
Now looking ahead, it is clear that we need to focus on the four commodity prices, butter, cheese, whey and nonfat dry milk (NDM), to anticipate where the Class 3 and mailbox milk prices may be headed. With butter price back down toward levels equal to May 2006, we cannot expect this commodity to carry the load. Butter is now at the $1.20/lb level. Whey has retreated from its July high and is currently trading in the neighborhood of $0.40/lb. No real help from that commodity. This leaves cheese and NDM. Cheese is currently staying quite strong just above $1.70/lb. The NDM has seen its peak and is currently trading at $1.40/lb. While this appears low by recent high standards, you must recall that it was not that far back when NDM was trading at support of $0.80/lb.
Why are these two commodity prices staying high? Cheese demand has been only fair at these higher prices. Cheese manufactures are reluctant to increase production with the recent high milk prices. Cheese inventories are light and this means that cheese manufactures must buy to cover holiday contracts. Cheese export sales are strong with USDA FAS reporting that for the first nine months of the year, exports of cheese and curds are up 37% over the same period last year. We can expect some decline in the cheese price after the holiday season, but if the export demand remains strong, the market should not weaken dramatically. Therefore, the driver for Class 3 is the cheese market, thus where it goes so will the Class 3 price.
For more information on the dairy industry, prices, and policy, link to my OhioDairyWeb 2007 at: http://aede.osu.edu/programs/ohiodairy/
Web links to Milk Marketing Information: Ohio Dairy Web - http://aede.osu.edu/programs/OhioDairy/; eDairy, Inc. - http://www.dairy.nu/