Milk Prices Begin to Firm as U.S. Production Begins to Cool Off

Dr. Cameron Thraen, Milk Marketing Specialist, The Ohio State University, Additional milk marketing information by Dr. Thraen

As we enter the summer 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 2005 website at this address: . Here, you will find a wealth of information on the national, regional, and Ohio dairy industries. Also, you will find current cash and futures markets charts and data, and my 24 week forecast for butter, nonfat dry milk (NDM), cheese, whey, and milk prices.

Cheese market

After peaking at $1.73/lb in 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 first 20 weeks of 2006, the CME average cash cheese price has fallen from the just-okay of $1.35's/lb to the not-okay $1.18/lb mark. The somewhat better news is that the bottom of this slide appears to have passed during the first week of March 2006 when the CME average cheese price hit $1.11/lb. This is a price not seen since May of 2003. The United States Department of Agriculture (USDA) Dairy Market News reports that cheese markets are firm, and it appears that the abundance of production relative to demand is correcting. Rising cheese prices, along with promotional specials, are moving inventory. While this is good news, do not look for the cheese price to regain its old glory anytime soon. My crystal ball has the National Agricultural Statistics Service (NASS) cheese price staying in the $1.18 to 1.21/lb range through September 2006. Could this change quickly? Certainly! Consider the two marketing years 2002 and 2003. In 2002, CME cheese prices fell all summer long and only recovered to $1.22/lb during the first week of October, before again retreating. Now consider 2003. The CME cheese prices started off low, $1.07/lb in March, and stayed there through June. Then, due to a hot, hot summer in the west, the CME cheese price moved up from $1.11/lb the last week of May to trade at $1.58/lb most of the weeks of August through early October of that year. For this to happen again, we need a serious slowing of milk production over the coming months.

Butter market

The USDA Dairy Market News reports that butter markets are showing some firming at the current price of $1.18/lb. Opinions are mixed as whether this is the bottom or not. The CME butter market has declined slowly after peaking only recently during the third week of September, at $1.72/lb. The CME cash butter has been trading at or under $1.17/lb since mid February. The NASS reported butter prices have followed this downward slide and were at $1.17/lb by the second week of May. My butter market forecast suggests that butter prices will begin to increase and reach $1.26/lb toward the third quarter of 2006. Like cheese prices, butter prices can move up very quickly given the right conditions. The NASS butter prices were reported at $1.15/lb for the week of October 17, 2003, and by April 23rd, 2004, they hit a market high of $2.30/lb! On the other hand, butter prices hardly traded over $1.10/lb during the entire period of May 2002 through July of 2003. Getting a handle on milk production will be the key to how quickly butter prices recover.

Skim powder and whey markets

The powder markets had been on an upward trend through all of 2005. The NDM, 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. The first twenty weeks of 2006 have experienced a reversal of this trend. With NDM prices in the west at support, product has move steadily to the Commodity Credit Corporation (CCC). Current CCC NDM inventory, at 38.7 million pounds, is 21.7% above the same period in 2005. During 2005, 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. Early estimates on world supply and demand suggested that this price may be the high for the coming year with the price retreating back to the $0.30/lb level. This has been realized. Current whey prices reported by NASS are 27.68 cents per pound and declining. The expectation is for the market to continue to decline to the mid 20 cent per pound range for the coming months.

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 the $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.


Figure 1. Federal Order 33 Mideast Price Information: 2000 to 2006 (estimate);
Blend = Federal Order 33 Uniform or Blend Price, PPD = Federal Order 33
Producer Price Differential, MBPrice = Calculated Federal Order 33 Mailbox Price,
and Year 1= 2000, 2 = 2001, etc.

The 2006 prices are generated to be consistent with the CME Class III futures contract prices as of May, 2006. The Producer Price Differential (PPD) and the mailbox price (MBPrice) for 2006 are estimates based on the average CME Class III futures price for 2006 and historical price averages for Federal Order 33. Consistent with the 2006 price, the 2006 MILC payment will average $0.60/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 price.