Dairy Policy and Market Watch

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

Market Watch

For dairy farmers, the milk price has been outstanding over the past 8 months.  Will this price strength continue into 2008?  To address his question, we will consider where this price strength has come from and what may lie ahead.  Table 1 provides the Class 3 and Class 4 milk price for the months of May 2006, July 2007, and the last month, October 2007.  In Table 1, you will find the contribution, both in dollars per hundredweight and as a percent of total milk price, by each commodity making up the price.  For example, back in May 2006, the Class 3 price was announced at it lowest point, $10.83/cwt.  The butter market contributed $4.40 (41%), the cheese market $5.72 (53%), and whey $0.71 (7%).  Now look at the second column, July 2007.  The whey market had taken off in an upward soar and contributed 15% or $3.15 to the Class 3 price.  The butter market was adding $5.64 to the Class 3 price, and cheese was adding a whopping $12.58.  Between July and October, the whey market had softened substantially and was contributing only $1.30 to the Class 3 price of $18.71.  Butter had returned to the May of 2006 level, while cheese continued to add $12.47 to the milk price.

In the lower section of Table 1, you will find the same dissection of the Class 4 milk price.  Back in May 2006, this was only 50 cents less than the Class 3 price.  By October 2007, the Class 4 price had overtaken the Class 3 price as the all important Class 1 mover.  Looking at Table 1, you can see that the dramatic rise in the price of nonfat dry milk (NDM), $0.82/lb in May of 2006 to $2.06/lb in October 2007, was responsible for 77% or $16.37 of the Class 4 price of $21.31.
Table 1. Classes 3 and 4 milk prices ($/cwt; NDM = nonfat dry milk).
Table 1

Now looking ahead, it is clear that we need to focus on the four commodity prices, butter, cheese, whey, and NDM, to anticipate where the Class 3 and Class 4 milk prices may be headed.  With butter price back down toward levels equal to May 2006, we cannot expect this commodity to carry the load.  Whey has retreated from its July high and is currently nearing $0.40/lb.  No real help from that commodity.  This leaves cheese and NDM.  Cheese is currently staying quite strong just above $1.91/lb.  The NDM may have peaked during the week of November 3 at $2.06/lb and is currently trading at $1.92/lb.  

Why are these two commodity prices staying high?  Cheese demand is only fair at these prices.  Cheese manufacturers are reluctant to increase production with these high milk prices.  Cheese inventories are light, and this means that cheese manufacturers must buy to cover holiday contracts.  Cheese export sales are strong with USDA Foreign Agriculture Service (FAS) reporting that for the first 9 months of the year, exports of cheese and curds are up 37% over the same period last year.  We can expect some decline in the cheese price after the holiday season, but if the export demand remains strong, the market should not weaken dramatically.  Therefore, the driver for Class 3 is the cheese market; where it goes, so will the Class 3 price.

Turning to the Class 4 milk price, it is apparent that NDM market has been phenomenal over the past six months.  This has been driven by an almost insatiable export demand.  Now, we are beginning to see some weakness in this market.  Domestic NDM production and inventories are heavy as could be expected with plus $2/lb prices and domestic demand has slowed.  According to the USDA FAS, export volumes are fulfilling past contract obligations, and new contracts are slow to materialize.  Export sales for the first 9 months have declined by 18% as compared to the same period in 2006.  Domestic cheese manufacturers will increase NDM use as the price falls below $1.90/lb, and this will help provide support.  The driver for the Class 4, and also Class 1, is the NDM market.  Where the NDM market goes over the next 6 to 8 months will determine what happens to the Class 4 price.  

For more information on the dairy industry, prices, and policy, link to my OhioDairyWeb 2007 at: http://aede.osu.edu/programs/ohiodairy/