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Buckeye Dairy News: Volume 2 Issue 1
Milk Price Outlook
Cameron Thraen, Dairy Economist
Milk Prices/Incomes High in 1998, Expect Declines but not Disaster in 1999.
January 28, 1999
Expected stronger growth in milk production and softening of commercial demand to push milk prices back to near normal levels.
Milk prices and cash income favorable in 1998
The 1998 dairy economy turned out to be very favorable for farmers. What appeared to be a lackluster year during the first five months has turned out to be a new record year for producers. The Basic Formula Price (BFP), which determines all other milk prices, started out in January of 1998 at $13.25. This was higher than the previous three years, but by May the BFP had retreated to $10.88 which was more inline with May of 1997 price. By December the BFP had advanced steadily to $17.34 and has set a record high for the year average at $14.20. This is $2.15 more than the $12.05 average for 1997. Based on these high milk prices, cash receipts from the sale of milk, are at record levels in 1998. Income from the sale of milk off the farm is running far ahead of 1997 and for the period January through September, is 11.9 percent higher than the same period in 1997.
Expect strong production growth and weaken milk check prices
The overall picture for milk production suggests strong growth in 1999. With low feed prices, low concentrate prices, low cull cow prices and a very favorable September milk-feed price ratio of 3.94, milk cow numbers are holding strong at this time. For the National Agricultural Statistical Service 20 reporting states, December cow numbers were up 14,000 head over January 1998. With these favorable milk price, feed prices, and weather conditions, milk production is expected to return to near normal rates of growth at 2% - 2.5% in 1999.
The expected growth in milk production will likely move milk prices and cash receipts back to levels similar to those experienced in 1995 and 1997. Commercial demand can be expected to grow by 1.5% in 1999. With demand projected to increase at about 1.5% in 1999 and milk production projected to expand at the brisk clip of 2.3 to 2.5%, the BFP is expected to retreat back to the $11.75-$13 dollar range. The average for 1999 should be close to the average of 1995/97 at $12.50 to $12.75 per cwt.
When all said and done, dairy producers need to keep in mind that the BFP is projected to stay above the 5 year average for all months of the year in 1999, and while not the high of 1998, this will give dairy farmers the third highest average milk price on record!
BFP Forecast for January 1999
The BFP for January will be released on Friday, February 5. At this time we can only forecast the BFP. To do this we need to know four items: (1) the Minnesota / Wisconsin base month price for December, 1998; (2) the Minnesota / Wisconsin average milkfat test; (3) the price of 1/10 pound of butterfat; (4) the December to January change in the average price of cheddar cheese #40 blocks as reported by the National Agricultural Statistical Service. As none of these items are publicly available prior to the February 5 release date, we out here in the industry can only "guestimate" what these figures may be and then forecast the announced BFP.
Here are my "guestimates":
Minnesota / Wisconsin Base Month Price: To know this we must guess at what grade B cheese plants reported they paid producers for milk during December 1998. My guess is that they will report that they paid somewhere in the $17.00 - $17.50 range for 3.5% milk. Remember, that although everyone is now focused on the decline in the cheese price, the Wisconsin Assembly Point average price was at its peak in December '98 at $1.9245.
Change in the Average Price of Cheddar Cheese: This number is the difference between the average price for December '98 and January '98 as reported by NASS. Keep in mind that this price is NOT the average price reported on the Chicago Mercantile Exchange. While the CME price has declined dramatically the survey price reported by NASS has not followed along. For the week ending January 22nd, the CME average price was $1.28 and the NASS survey price was reported at $1.8177. This is a $0.5377 difference. What this means is that the decline in the price of cheese as reflected on the CME market will not show up until the NASS prices influence the February BFP calculation.
January 1999 BFP Forecast: I expect the announced BFP to be in the $16.30 to $16.50 range. Looking at the BFP futures contract price trading on January 28th of $15.70 I think that the market is focusing on the CME cheese prices and not the NASS cheese prices. This price of $15.70 is TOO low and I forecast that the BFP futures contract will increase over the next week to reflect the reality of a high Base month price in December and higher NASS cheese prices and not CME cheese prices.
Planning: A Vital Function of Management
For most dairy producers, this is a slower time of the year. With a bit of free time in your hands, you should manage to make room for planning. We know that you dont like sitting behind a desk to scribble numbers on a piece of paper. Thats a female job I was once told. But this female job is a vital component of management.
First, you must do some short-term planning. What meetings will you attend in the next 2-3 months. Getting a free hat should not be an important criterion to your selection of meetings! In this issue of Buckeye Dairy News, we suggest a few meetings/conference/workshops that you, your spouse or employees should consider attending.
Second, the tax season should provide you with an incentive for long-range planning. In Northeast Ohio, Dairy Excel is offering four workshops titled Positioning Your Dairy. Participants will learn how to prepare long-range plans and what factors should be considered in the process. If you have an interest in the workshop but do not reside close to any of the four locations, call your county Ag. Extension agent. We'll see how we can accommodate your needs.
Why should you waste your time planning for the future if the world is coming to an end? The issue of Y2K is getting more and more attention by the news media. Some even predict an end to human life as we know it! What are facts and what is fiction? What should you do? To help you manage Y2K in your herd, we are reprinting an article written by Dr. Roger Cady from Washington State University that explains the problem, how it will affect you and how you should manage the crisis. Sit down, relax and enjoy (then start planning)!