April 4 2014 06:53 AM

Market Psychology

The prices of all dairy products continue to be at record or near record levels. The CME block cheese price rose by 7.1% in March, but this is a few cents below the high of $2.43 a week ago. It is now $2.38/lb. This higher cheese price of course is reflected in a strong Class III price (see below). This general strength in all dairy product markets continues to be fueled by exports. CME butter prices are up 10.5¢/lb. in the past month at $1.985/lb. The butter price began to climb rapidly in mid-March, reaching $2.00/lb. on April 1. Chinese export demand for dairy products has lifted all dairy markets. Like butter, the CME skim-milk powder price is essentially unchanged at $2.0975/lb. Dry whey prices rose 3.1% to $0.63/lb.

Table 1 lists some past and estimated future milk prices. The March Pennsylvania all-milk price was $0.60 higher than February at $26.50/cwt., another record high price. Although feed prices are creeping up, the milk price has risen even faster. The March Class III price was $0.02 lower than February at $23.33/cwt., still a very high price. The Class III futures price for April is $24.03. Average Class III futures prices for the remaining nine months of 2014 are up $2.27 over 2013 prices for the same months at $20.44. As seen in Table 1, the April price is expected to be the highest for the year, since current expectations are that cheese markets will fall as the year progresses. The March Class IV price was up $0.10/cwt. from February at $23.66/cwt. The prices for Class IV futures average $21.02/cwt. for the rest of 2014, also up from last month. The March Class IV price is expected to be the highest of the year, with lower Class IV futures prices as 2014 progresses. Recent PA all-milk prices and the forecast prices for the rest of 2014 based on the futures prices are also shown in Table 1. The forecast all-milk prices for 2014 average $2.70/cwt. above the average for 2013, with the higher prices in the first half of the year.

The U.S. dollar is higher in the past month against the Australian and New Zealand dollars and about the same against the Euro. This difference is relative value has been noted by various market followers, especially since it is accompanied by a fall in the Chinese currency as well, making U.S. dairy products more expensive for China even without the more expensive dollars.

Corn and Soybean Markets
Corn has risen since last month, ending at $4.96/bu. (up 4.4%) for the May 2014 contract. Corn and soybeans have both rallied with the drought news from Brazil, now a major exporter of both. Soybeans and soybean meal are up a bit since last month, with beans up $0.42/bu. to $14.62/bu. for the May 2014 contract and meal up $20/ton at $477.

Income over Feed Costs (IOFC)
Penn State's measure of income over feed costs rose by 1.9% in March. Figure 1 shows how unusual these higher values are compared to recent years. This is an increase of 22¢/cow/day. The March value of $12.06/cow/day is once again the highest value since we began calculating this measure in January 2000. Although both the milk price and feed cost rose in March, the net effect was positive. Feed prices rose by only 3.3%, with small gains in all three ingredients in the constant ration we use to calculate IOFC. The cost of feeding a cow rose by 16¢/day to $5.16. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Figure 1 and Table 2 showing the monthly data follow.

The allocation of the revenue per hundred pounds of milk is shown in Table 3. The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. Like income over feed cost, this measure shows that the March PA milk margin was 1.9% higher than in February.

Milk Production
As can be seen in Figure 2, milk production for February was slightly more than in February 2013. This lack of growth (0.8%) follows two months of no change. Given the improvement in profitability in recent months, this small increase is notable. The number of dairy cows is shown in Figure 3. February cow numbers are slightly below February 2013 and slightly more than December 2013. As with milk production, the stable cow numbers are surprising in the face of better margins. The record-high beef prices are affecting cull rates, plus the drought in the west is limiting expansion there.

By Jim Dunn
Professor of Agricultural Economics
Penn State University

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