Dr. Cameron Thraen, Milk Marketing Specialist, Ohio State University,
Additional milk marketing information by Dr. Thraen
With the beginning of 2005, there is a lot of uncertainty about where the all-important commodity prices (cheese, butter, whey, and nonfat skim milk powder) will be heading over the next 12 months. Currently, the cash markets are very robust for this time of year. Cheese on the Chicago Mercantile Exchange (CME) is resisting a fall below the $1.45/lb mark. Likewise, butter on the CME is staying above the $1.58/lb level. With world supplies of skim powder being in tight supply, there is upward movement in the nonfat dry milk commodity market. This strength at the commodity level has forged itself into the CME futures market for Class III. While the futures contract level for 2005 has retreated some from levels reached last fall, there still is a good premium in the market, especially for the January through March contracts. To get a daily update on the premiums or discounts in the CME futures market, check out my website at http://aede.osu.edu/programs/ohiodairy/ and select the heading "2005 Class III Futures Price Premiums".
Table 1. Dairy commodity price ($/lb) forecasts for 2005.
Forecast for Planning Year |
Grade AA Butter
|
Nonfat Dry Milk
|
Cheddar Cheese
|
Whey Protein
|
2004 Averages |
1.8275
|
0.8406
|
1.6437
|
0.2354
|
2005 Quarter I |
1.5286
|
0.8848
|
1.4630
|
0.2343
|
2005 Quarter II |
1.5267
|
0.8815
|
1.4644
|
0.2182
|
2005 Quarter III |
1.5850
|
0.8710
|
1.5756
|
0.1808
|
2005 Quarter IV |
1.4900
|
0.8467
|
1.4989
|
0.1932
|
2005 Annual Average Forecast |
1.53
|
0.87
|
1.50
|
0.21
|
Table 2. Dairy component ($/lb) and milk check price forecast for 2005 (FO = Federal Order).
Forecast for Planning Year |
Grade AA Milk Fat
|
Protein
|
Other Solids
|
Nonfat Solids
|
Base Milk Value
|
Estimated Producer Price Differential FO 33
|
Estimated Gross Milk Check Price
|
Test@Market % |
3.5
|
2.99
|
5.6935
|
5.9
|
$/cwt
|
$/cwt
|
$/cwt
|
2004 Averages |
2.055
|
2.601
|
0.079
|
0.694
|
15.421
|
-0.03
|
15.39
|
2005 Quarter I |
1.6964
|
2.3961
|
0.0776
|
0.7374
|
13.55
|
0.24
|
13.74
|
2005 Quarter II |
1.6940
|
2.4033
|
0.0609
|
0.7341
|
13.47
|
0.67
|
13.14
|
2005 Quarter III |
1.7640
|
2.6877
|
0.0225
|
0.7237
|
14.34
|
0.75
|
15.19
|
2005 Quarter IV |
1.6500 |
2.5606
|
0.0352
|
0.6996
|
13.64
|
0.40
|
14.04
|
2005 Annual Average Forecast |
1.7011
|
2.5119
|
0.0491
|
0.7237
|
13.75
|
0.73
|
14.48
|
Class prices in 2005 will not be as robust as they where in 2004. Table 3 lists the recent 2005 price forecast for Federal Order 33 with a comparison to the 1999 through 2004 prices. The statistical uniform price estimate is based on an assumed historical average utilization for each class of milk during the calendar year.
Table 3. Comparison of class prices in Federal Order 33 from 1999 to 2004 with a forecast for 2005.
Calendar Year |
Class I ($/cwt)
|
Class II ($/cwt)
|
Class III ($/cwt)
|
Class IV ($cwt)
|
1999 |
15.87
|
13.15
|
12.44
|
12.26
|
2000 |
13.67
|
12.65
|
9.74
|
11.83
|
2001 |
16.26
|
14.42
|
12.93
|
13.49
|
2002 |
13.01
|
11.56
|
10.40
|
10.82
|
2003 |
13.39
|
10.76
|
11.42
|
10.00
|
2004 |
16.95
|
13.69
|
15.10
|
13.00
|
2005* |
16.08
|
13.34
|
13.75
|
12.24
|
Statistical Uniform Price Estimate: $13.96/cwt |
*Quarter I through Quarter IV: 2005 forecast.
It is fair to ask what could alter the dairy product and milk price forecasts for 2005. Let's consider these factors as they may push prices up or down going into 2005. Feed prices are down and the milk-feed price ratio is at its highest point in the last three years. At this time, it appears that 2005 will be another very good year for milk prices and dairy farm income.
Price enhancing factors:
First, a return to more aggressive culling and a continued tight heifer replacement market. The current situation shows cull cow prices increasing into 2005. This will provide added incentive to increase dairy cow slaughter over the 2004 level which was down 17% from 2003. Second, the Cooperatives Working Together (CWT) program is slated to remove 49,000 head from the milking herd during the first half of 2005. Put these two together and we have the makings for an even tighter milk supply situation going into the summer of 2005. Couple this with the rebound in the general economy and dairy commodity prices will remain strong. Without any indication that the flow of dairy heifer replacement animals across the U.S. - Canada border will begin anytime soon, these conditions could add another $0.20 to 0.30/cwt to the price forecast.
Price reducing factors:
Cow numbers are rebounding from their lows in early 2004, and output per cow is also showing that it is getting back on trend. With the announcement by Monsanto, stating that bST allocations would be increased from 50 to 70 percent on December 1, 2004, we could look for the tight supply - demand situation evident in 2004 to lessen in 2005. If this is coupled with a weakness in consumer demand (due to escalating energy and utility prices and renewed weakness in the investment and employment markets), we could see prices for butter and cheese stay lower than those forecasted. This would remove $0.20 to 0.30/cwt from the current forecast.
Policy Issues: Mideast Federal Order 33
This warrants repeating. The number one policy issue facing dairy farm families in the Mideast Federal Order is that of re-pooling and its impact on the Uniform Market price. Emergency hearings to consider re-pooling are complete in our sister orders, Federal Order 30 and Federal Order 32. The proposal period terminated on January 7, 2005. We now await the official notice of a hearing, most likely scheduled for mid to late March 2005. The entire process will culminate in a producer vote on new order language sometime in late spring or early summer. Plan to vote when this referendum is scheduled- it is crucial to your paycheck.
For a complete update on current market conditions, futures, and options markets, and policy issues of importance to Ohio and Federal Order 33 producers go to my web site, Ohio Dairy Web 2004, and click on Cam's Price Outlook.