Milk and Dairy Product Production Climbs - What's Down the Road for Milk Prices?

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

As we enter the start of the 2006 calendar year, it is time to take stock of where we are milk price-wise and where we are likely to go in the next 12 months. In this column, I will review the trends observed in the cash markets for dairy commodities. If you would like to follow my weekly price projections for the milk and dairy product markets, you can do so by accessing my Ohio Dairy website at this address: . Here, you will find a wealth of information on the Ohio dairy industry, current cash and futures markets, and my 24 week forecast.

Cheese market

After peaking at $1.73/lb in the last week of January 2005, the Chicago Mercantile Exchange (CME) average cheese price has followed a general downward trend through the end of 2005. Over the last 16 weeks of 2005, the CME average cash cheese price has fallen from the comfortable $1.50's/lb to the not so comfortable $1.35/lb mark. This is a price not seen since February of 2004. The last time CME cash price for cheese 40 lb blocks traded below this level was back on June 27, 2003, with a close of $1.275/lb. By the week ending March 4, the CME average cheese price had declined further to $1.115/lb. The last time CME cheese dropped this low was back in April of 2003. The Dairy Market News reports that cheese markets are weak and may remain so well into the first half of 2006. Look for the cheese price to remain low for sometime to come. My crystal ball has the National Agricultural Statistics Service (NASS) cheese price staying in the $1.11 to 1.13/lb range through July 2006. Higher cheese production costs as a result of soaring energy costs have severely squeezed cheese to milk margins and made life difficult for some parts of the US cheddar cheese industry.

Butter market

The CME butter market has followed a different path, peaking only recently during the third week of September at $1.72/lb. However, by the end of February 2006, the CME butter market has also lost steam and has slid down to $1.185/lb on the CME cash market. The NASS butter prices have followed this downward slide and were at $1.20/lb by the last week of February. My forecast suggests that butter prices will trade in the $1.20 to 1.23/lb range before regaining strength toward the last quarter of 2006.

Skim powder and whey markets

The powder markets have been on an upward trend through all of 2005. Nonfat dry milk (NFDM), benefiting greatly from a very tight world market for skim powder, increased steadily from a low of $0.88/lb to its high of $1.00/lb. In the opening weeks of 2006, NFDM has lost some stream and is currently trading at a price of $0.85/lb. At the current rate of milk production, with the balancing going to the skim powder market, the NASS price for NFDM could drop back to the support price of $0.80/lb by May 2006. Over the past year, the dry whey market moved in lockstep with the rising skim powder market, increasing from a low of $0.24/lb to the current high of $0.35+/lb. World supply and demand reporting for the international market suggests that this price may be the high for the coming year, with the price retreating back to the $0.30/lb level.

Let's take a look at what is ahead for milk prices

With milk cow numbers increasing, dairy slaughter low, and the energy prices siphoning disposable income from the consumer pocketbook, we can anticipate low milk prices over the next 12 months. Projected Federal Order 33 producer prices for 2006 are shown in Figure 1. With butter and cheese prices staying just above support price levels, the estimate for the 2006 Federal Order 33 mailbox price is $12.63/cwt. At the low Class III prices, the Milk Income Loss Contract (MILC) program will contribute another $0.60 to 0.80/cwt on eligible milk shipments.

It remains to be seen what impact the Cooperative Working Together (CWT) program will have on these forecasts. The membership of CWT voted this past week to double the program's current $0.05/cwt assessment, in order to accumulate the additional financial resources necessary to address the surge in US milk production that is beginning to depress farm-level prices. The higher assessment will begin on July 1 and run through 2007. In addition to voting for a higher assessment, members also modified several other features. The regional safeguard levels in the northeast, southeast and midwest were raised. Whole milk powder (WMP) was added to the list of dairy products eligible for export bonuses, and Mexico, a major market for WMP, was added to the list of eligible destinations for WMP. The target price for cheese under the export assistance program was lowered from $1.40 to 1.30/lb. The target butter price remains at $1.30/lb.

Figure 1. Federal Order 33 Mideast price information: 2000 to 2006 (estimate).1

1Blend = Federal Order 33 Uniform or Blend Price ($/cwt), PPD = Federal Order 33 Producer Price Differential ($/cwt), MBPrice = Calculated Federal Order 33 Mailbox Price ($/cwt), and Year 1= 2000, 2 = 2001, etc.

The 2006 prices are generated to be consistent with the CME Class 3 futures contract prices as of March 13, 2006. The producer price differential (PPD) and the mailbox price (MBPrice) for 2006 are estimates based on the average CME Class 3 futures price for 2006 and historical price averages for Federal Order 33. Consistent with the 2006 price, the 2006 MILC payment will average $0.59/cwt on a maximum of 2,400 cwt. For comparison, the MILC payment averaged $1.20/cwt in 2002 and $1.63/cwt in 2003, both years of low Federal Order 33 mailbox prices.

Useful MILC web links