Milk Prices May Firm as the Summer Heats Up and U.S. Milk Production Cools Off

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

As we enter the second half of the HOT - HOT - HOT 2006 summer, 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 2006 website at this address: . Here you will find a wealth of information on the national, regional, and Ohio dairy industries; 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

Over the first 28 weeks of 2006 the Chicago Mercantile Exchange (CME) average cash cheese price has fallen from the just-okay of $1.35's/lb to the not-okay $1.14/lb mark. It appeared that the bottom of this slide 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. After recovering to the $1.24/lb mark during the first week of June, prices have retreated back to support levels. The USDA Dairy Market News reports that cheese markets are unsettled to weak. Commercial demand is slower as buyers wait for yet lower prices. However, with record heat across all of the U.S. dairy production regions, milk production gains will vanish and this will put more upward pressure on cheese prices in the coming weeks. If the heat wave does not let up soon, look for any tightness in the cheese market to be reflected in a rally in the CME cheese price.

Butter market

The USDA Dairy Market News reports that butter markets are generally steady with an adequate supply in inventory to supplement a slowing milk production. 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 National Agricultural Statistics Service (NASS) reported butter prices have followed this downward slide and were at $1.129/lb by the first week of July. Commercial demand has responded to lower prices, increasing 17% on an average daily basis, February - April 2006 compared to the same period in 2005. With the hot weather, I am still looking for butter prices to begin to increase and move into the mid $1.20's/lb toward the third quarter of 2006.

Skim powder and whey markets

Both the NDM and dry whey markets have fallen over the 28 weeks of 2006. With NDM prices in the West at support, product continues to move steadily to the Commodity Credit Corporation (CCC). Current CCC NDM inventory, at 66.0 million pounds, is 112% 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 $0.27 to 0.28/lb. The expectation is for the market to continue to trade in this range for the coming months.

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

My forecast is unchanged from the May issue of Buckeye Dairy News. The factor to watch is the duration of the hot humid weather across the United States, which has forced down milk production per cow and significantly slowed the rate of increase in milk production for the U.S.
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If the oppressive heat continues, particularly in the west and southwest and southeast, this could have a significant impact on prices later in the year. It is too early to call this one, and we will have to wait to see how long the heat wave lasts. 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 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 (estimated) {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 PPD and the MBPrice for 2006 are estimates based on the average CME Class III futures price for 2006 and historical price averages for Federal Order 33.