Market Watch - May 2012

Dr. Cameron Thraen, State Extension Specialist, Dairy Markets and Policy, The Ohio State University

Dairy Commodity and Milk Price Outlook for June 2012 - August 2012.

To start this edition of Market Watch 2012, I will review a couple of trends in U.S. milk production and milk price and provide an outlook for milk prices and dairy farm returns the next six to twelve months.

U.S. Milk Cows and Milk Yield

Chart 1 shows the monthly history of: 1) milk production per cow (right scale dashed line), and 2) total number of milk cows (left scale, solid line), for the United States, December 2009 - April 2012.  I have selected the start month of December 2009, as this was the month that the number of milk cows in the U.S. bottomed out as a response to negative returns on most U.S. 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 U.S. herd has been generally positive over the past two years, contributing to an upward rise in the total number.  Over this time period, 190,000 dairy cows have been added back to the U.S. dairy herd.  The U.S. herd expansion is at an estimated annual rate of +0.84%.  During this same period, milk production per cow has remained fairly flat (adjusted to a 30-day month), only showing an upswing beginning in December 2011.  For the first four months of 2012, average daily milk production per cow was 60.8 lb/cow as compared to 59.1 lb/cow for the same months in 2011.  For the January - April 2012 period, the average monthly U.S. milk yield was 1,826 lb/cow.  With very favorable weather over the past six months, milk yield on the seasonal upswing and cows added to the national herd, milk production continues a robust expansion in the first half of 2012.  There are signs that with lower net returns, this expansion is slowing down as we move into the summer months.  With an estimated 9.272 million dairy cows nationally, milk production increased 3.22% at an annualized rate in April 2012.

Chart 1

Chart 1. U.S. milk cows and milk yield, monthly 2010 - 2011.

Milk Production Growth and the Class 3 Milk Price

Chart 2 depicts the recent relationship between:  1) the Class 3 milk price (line, left scale) and 2) the annualized rate of change in U.S. milk production (bars, right scale) over this same time period.

Milk production growth in the U.S. 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  it fell to under $14/cwt in late 2010.  With both cow numbers and productivity declining in the last half of 2010, the growth in U.S. 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.  With a 7.3% annualized rate of growth over the March 2011 - February 2012 period, real pressure is on the Class 3 milk price.  The current expectation for the May - October Class 3 price is $15.84/cwt.  The expectation for the next 12 months is $15.77/cwt.

Chart 2

Chart 2. Class 3 price and annual rate of growth in U.S. milk production, 2010 - 2011.

What Lies Ahead in 2012?

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 May 22, 2012 (the unconnected blue dots), the median Class 3 price over the period 2007-2011 (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 below the recent historical price range.  As we move into the 2012 summer months, the CME futures prices rebound slightly to the $15.80 to $16.30/cwt range.  Overall, the CME market participants are pricing milk for Class 3 use at an average of $15.84/cwt over the coming six months, $15.77/cwt for next six months, and $15.77/cwt for a 2012-2013 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, adds about $2.70 to $3.00/cwt to the Class 3 milk price.  With the current CME market anticipating a $15.77/cwt Class 3 milk price, the mailbox price for planning purposes will be in the range of $18.47 to $18.77/cwt.  For a relative comparison in 2011, the Class 3 price averaged $18.41/cwt and the FMMO Mailbox price $20.64/cwt.

Chart 3

Chart 3. The 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 Chart 4 are my estimates of the total dollars available to contribute to allocated costs on a per cow basis for Ohio.  Allocated costs include capital payments and returns to equity plus returns to management.  These are the dollars from the sale of milk which, after paying for feed and non-feed operating expenses, contribute equity to a dairy farming operation.

Chart 4

Chart 4.  Estimated allocated revenue available per cow 2003 - 2011: Ohio.

The financially difficult years of 2003, 2006, and 2009 are evident.  In these years ,there was very little revenue remaining  after paying operating costs to contribute to allocated costs.  This was especially true for 2003 and 2009.  From a different perspective, also evident are the years of 2007 and 2011.  Here we see that there was over $1200/cow available to pay down debt, build equity, and provide for a return to management of the dairy operation.  The recover from 2009 has generated the upward trend in milk cows added to the national dairy herd and the mild winter for the expansion in milk yield.  Together, these have contributed to a robust expansion in U.S. milk production.  With milk prices lower in 2012 than 2011, I would project that the allocated cost per cow for 2012 will be closer to 2010 in magnitude.

For more information on the market outlook, as well as my insights on U.S. dairy policy, please visit my Ohio Dairy 2012 website.  You can visit: for the latest market and policy information of importance to the Ohio dairy industry.