Dairy Policy and Market Watch

Dr. Cameron Thraen, Milk Marketing Specialist, The Ohio State University

Market Watch - 2008

For dairy farmers, the milk price has been outstanding over the past 12 to 13 months. Will this price strength continue into and throughout 2008? Clearly with significantly higher feed, and fuel and energy prices in 2008, it is critical to maintain adequate profitability on farms with hope that market prices do not collapse in the coming months.

To address his question, I will consider where this milk price strength has come from and what may lie ahead. The included table shows the average Class 3 and Class 4 milk price for 2006, 2007, and the first two months of 2008. In the table, you will find the contribution, both in dollars per hundredweight and as a percent of total milk price, by each commodity making up the price. For example, considering 2006, the Class 3 price averaged only $11.88/cwt. The butter market contributed $4.64/cwt (39%), the cheese market $6.26/cwt (53%), and the dry whey market $0.99/cwt (7%). Now look at the second column which shows the averages for 2007. The cheese and whey markets had taken off in an upward soar and contributed $10.51/cwt (58%) and an outstanding $2.39/cwt (14%) to the average Class 3 price of $18.04/cwt, respectively. The 2007 butter market increased modestly and added $5.14/cwt (29%) to the average Class 3 price.

In the lower section of the table, you will find the same dissection of the average Class 4 milk price. Back in 2006 this was only $0.82/cwt less than the Class 3 price. By the end of 2007, the Class 4 price had overtaken the Class 3 price as the all important Class 1 mover, averaging $0.32/cwt more than Class 3. Looking at the table, you can see that the impact of the dramatic rise in the market price of nonfat dry milk, averaging $0.87/lb in 2006 and increasing to $1.88/lb in 2007, was responsible for 72% or $13.22/cwt of the average 2007 Class 4 price of $18.36/cwt.


What lies ahead in the 2008 marketing year?

Now looking to 2008 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 Class 4 milk prices may be headed. With the butter price back down toward levels equal to 2006, we cannot expect this commodity to make a major contribution to either the Class 3 or Class 4 price. Whey has retreated to levels not seen since mid-2006 and is currently under $0.25/lb. Given current supply and demand conditions, I do not expect to see any real help from that commodity in 2008. This leaves cheese and NDM. Cheese is currently staying quite strong with the February 2008 price reported at $1.84/lb. The NDM peaked during December 2007 at the month average price of $2.10/lb. The NDM is currently trading at $1.30/lb on the Chicago Mercantile Exchange.

Why are these two commodity prices staying high? Cheese demand is only fair at these prices. Cheese manufactures are reluctant to increase production with these 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 where it goes so will the Class 3 price.

Turning to the Class 4 milk price, it is apparent that NDM market has been phenomenal over the past 15 to 16 months. This has been driven by an almost insatiable export demand. Now, we are beginning to see some real weakness in this market. Domestic NDM production and inventories are heavy as could be expected with plus $2/lb prices and domestic and international demand has slowed. According to the USDA FAS, export volumes are fulfilling past contract obligations and new contracts are slow to materialize. Export sales for the first nine months of 2007 have declined by 18% as compared to the same period in 2006. Domestic cheese manufactures will increase NDM use as the price falls below $1.30/lb and this will help provide support. The driver for the Class 4 price is the NDM market. Where the NDM market goes over the next 9 months will determine what happens to the Class 4 price.

For more information on the dairy industry, prices, and policy, link to my OhioDairyWeb 2008 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/