Dr. Cameron Thraen, State Extension Specialist, Dairy Market and Policy, The Ohio State University
Dairy Commodity and Milk Price Outlook for February 2012 to July 2012.
To start of this edition of Market Watch 2012, I will review a couple of trends in U.S. milk production and milk price now that the numbers for 2011 have been reported. I will then provide an early outlook for milk price going into 2012.
US Milk Cows and Milk Yield
Chart 1 shows the monthly history of i) milk production per cow (right scale, dashed line), and ii) total number of milk cows (left scale, solid line), for the United States, December 2009 to December 2011. I have selected the start month of December 2009 as this was the month wherein the number of milk cows in the US bottomed out as a response to negative returns on most US dairy farms in 2009 (during 2009 an estimated 250,000 head were culled as a result of low milk price and high input cost). The number of milk cows added to the US herd has been generally positive over the past two years, contributing to an upward rise in the total number. Over the 2010 to 2011 time period, 137,000 dairy cows have been added back. The US herd expansion is at an estimated annual rate of +0.8%. During this same period, milk production per cow has remained fairly flat (adjusted to a 30 day month). The average monthly US milk yield is 1,743 lb/cow over this period. Looking ahead, we see that milk yield is already on the seasonal upswing and cows are being added to the national herd, which would suggest that milk production is set to expand in the first half of 2012.
Chart 1. US milk cows and milk yield, monthly 2010 to 2011.
Milk Production Growth and the Class 3 Milk Price
Chart 2 depicts the recent relationship between i) the Class 3 milk price (line, left scale) and the annualized rate of change in US milk production (bars, right scale) over the period December 2009 to December 2011.
Chart 2. Class 3 price and annual rate of growth in US milk production, 2010 - 2011.
Milk production growth in the US was quite robust in 2010, hitting over 2% annual rate for the last two-thirds of the year. During this same period, the Class 3 milk price showed some improvement, but fell to under $14/cwt in late 2010. With both cow numbers and productivity declining in the last half of 2010, the growth in US milk production slowed considerably. Milk prices responded, moving up from $13.48/cwt in January 2011, to top out at $21.67/cwt in August 2011. Since then, with the annual rate of growth in milk production heading steadily upward and approaching 2.5%, the Class 3 milk price has declined. The December 2011 Class 3 milk price was announced at $18.77/cwt.
What lies ahead in 2012?
Looking ahead, with dairy operations adding milk cows nationally, and the seasonal upswing in milk output per cow underway, it appears that there will be pressure on the milk price to retrench further. Taking a look at the Chicago Mercantile Exchange (CME) Group Class 3 futures prices can provide an insight as to what the market participants are anticipating for the coming year. Chart 3 shows the CME Class 3 futures price for 2012, as of settle on January 25, 2012 (the unconnected blue dots), the median Class 3 price over the period 2007 to 2011 (the solid line), the upper 25 percentile price line (upper dashed line), and the lower 25 percentile price line (lower dashed line). Currently, the market is pricing Class 3 milk significantly above the recent historical price range. As we move into 2012, the CME futures prices decline somewhat to the $16.50 to $16.85/cwt range. Overall, the CME market participants are pricing milk for Class 3 use at an average of $16.89/cwt over the coming six months, $17.12/cwt for the last half of 2012, and $17.00/cwt for a 2012 average. In Ohio and the Mideast Federal Milk Marketing Order (FMMO) 33, the average dairy operator's milk check, as measured by the announced FMMO Mailbox price, runs about $2.70 to $3.00/cwt to the Class 3 milk price. With the current CME market anticipating a $17.00/cwt Class 3 milk price, the mailbox price for planning purposes will be in the range of $19.70 to $20.00/cwt. For a relative comparison, in 2010, the Class 3 price averaged $14.41/cwt and the FMMO Mailbox price was $16.88/cwt.
Chart 3. Chicago Mercantile Exchange (CME) Class 3 futures price, median Class 3 price, and 25% upper/lower percentiles.
What does this mean for a typical dairy farm in Ohio?
Milk prices are obviously very important to the financial health of a given dairy. However, as we witnessed in 2008, milk prices at the $20/cwt level mean little if expenses for feed and other inputs are soaring. The data in Table 1 report the relationship between milk price, as measured by the FMMO Ohio Mailbox price, the cost of feed and non-feed inputs, and the net margin measured as milk income over cost. The data in the table show this income versus cost structure for the years 2003 through 2011 (the last reported month for 2011 is November). The last column in the table shows the current income to cost situation and can be compared to estimates for prior years. The first thing to note is a significant increase in the mailbox price in FMMO 33 for 2011 compared to prior years. My estimate for all of 2011 is $21.7/cwt. Next, note that while feed and non-feed input costs are high, they have softened from the peak in 2008. This has produced a milk income over feed and non-feed cost margin higher than any prior year during this period, including the years 2007 and 2008. The last three rows of the column on the right show these margins on a hundredweight basis. Milk income over feed is above $11/cwt; income over non-feed is over $18/cwt; income over total operating cost (feed and non-feed) is over $7/cwt. Each measure is well above the recent past.
Table 1. USDA Cost and Returns for a typical Ohio dairy, 2003 to 2011.
What to watch for in the coming weeks?
At this time, the item I am watching is the current Class 3 milk price on the CME and the cash cheese price. With cash butter at $1.56/LB, the current CME Class 3 price is consistent with a spot cheese price of $1.72/lb. The current cash price for cheese is about $1.50/lb. So, either the CME Class 3 is pricing cheese correctly and the spot will have to increase, or what I suspect to be more likely, the CME Class 3 price is too high and will have to adjust down to get back into a normal relationship with the cash cheese price. Be prepared for a downward adjustment in the CME Class 3 price in the first half of 2012.
My six month forecast for dairy commodity prices and milk prices is available on my Ohio Dairy 2012 website. You can visit: (http://aede.ag.ohio-state.edu/programs/OhioDairy/ for the latest market and policy information of importance to the Ohio dairy industry.
The Ohio Dairy Web 2012
If you have been looking for the Ohio Dairy 2012 website and unable to connect, this is because it was moved. Recent changes to the College of Food, Agriculture and Environmental Sciences and Agricultural, Environmental, and Development Economics (AEDE) website addresses have necessitated a new address for my Ohio dairy website. The most reliable link to reach the dairy website is to bookmark the AEDE department's new web address and then link to the dairy website by selecting 'Programs and Research / Ohio Dairy Web'. The new AEDE website address is: http://aede.osu.edu. The direct link to Ohio Dairy Web 2011 is currently http://aede.ag.ohio-state.edu/programs/OhioDairy/ .