Prices Will Depend on Production Levels

Volume 140, No.9, Friday, August 21, 2015

Milk prices will hold for another month and in fact prices may be a little higher than July. The July Class III price was $16.33 and may be near $16.40 for August. However, weaker nonfat dry milk prices may lower the August Class IV price to around $12.85 compared to $13.15 in July.

Restaurant and foodservice demand remains strong for cheese and butter supporting prices despite much weaker exports. June cheese exports were 22 percent lower than a year ago and butter exports were 75 percent lower.
But, cheese prices will average a little higher in August than July.

Lower nonfat dry milk prices earlier in the month more than offset higher butter prices lowering the Class IV price. Nonfat dry milk averaged $0.7622 per pound for July. Since about half of nonfat dry milk production is exported nonfat dry milk prices are heavily depended upon exports. Nonfat dry exports in June were 23 percent lower than a year ago.

The question is how long will cheese and butter prices hold at these levels? Three factors will support prices. One is declining milk production and milk composition seasonally during the hot summer months. Second, buyers will be placing orders and building inventory for the strong holiday season. Third, schools will be opening which increases fluid (beverage) milk sales.

But, dairy product production has been higher than a year ago and stocks are building. June dairy product production show butter production 1.7 percent higher than a year ago, NDM production 10.6 percent higher, Cheddar output 4.3 percent higher and total cheese production 1.5 percent higher.

June 30th stocks show butter 27.8 percent higher than a year ago and 10.8 percent higher than the five-year average for this date. Natural cheese stocks were 4.5 percent higher and 4.6 percent higher than the five-year average for this date. Total cheese stocks were 8.1 percent higher and 5.9 percent higher than the five-year average for this date. Manufacturers’ stocks of nonfat dry milk were not only 15.2 percent higher than a year ago, but also a record high.

Dairy exports will not offer much support for higher dairy product prices or milk prices until perhaps the second half of 2016. June exports declined for the fourth straight month. On a total solids basis exports were equivalent to 14.6 percent of total milk production compared to 15.4 percent last year.

World prices are well below US prices making export challenging. According to USDEC world market prices for skim milk powder and whole milk powder are the lowest in more than a decade, about half of what they were a year ago. Cheese, butter and whey prices are at a six-year low, down 25 percent to 45 percent from last year.

According the USDEC without large imports from the two largest importers China and Russia, it will take a greater and lengthier contraction in world milk production to clear the existing overhanging supply of dairy products. In addition, with increased supply from Europe and Oceania US exporters face very aggressive competition for markets. Also higher US prices is attracting more imports. Imports were equivalent to 3.8 percent of US milk production in June, the highest of the year.

So where milk prices are headed over the remainder of this year and into 2016 will depend heavily upon the level of milk production. Compared to a year ago, June milk production was up 0.9 percent and July up 1.2 percent. For the year-to-date production is up 1.6 percent. The July increase was due to 0.6 percent more cows than a year ago and 0.6 percent more milk per cow.

If milk production continues to increase by more than 1.0 percent, which is expected, dairy product prices and milk prices will likely show some weakness, especially once butter and cheese buyers fill their orders for the holiday season. Prices could hold for another month or two before showing some softness.

However, the futures market remains rather optimistic. Class III futures actually shows some strengthening for next few months with an October peaking at $16.90 and declining to $16.25 for December. Class III futures are lower in 2016 with $15’s for the January through June period and then in the $16’s.

With the recent increases in both butter and NDM prices Class IV futures have rallied with September at $14.71 and October at $15.09 and ending in December at $14.77 and staying in the $14’s through April of next year. The probability that final prices end up higher than this is less than ending up a little lower. BC

Dr. Bob Cropp is the Professor Emeritus at the University of Wisconsin-Madison


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