How Low Milk Prices Will Go

Penn State dairy economist says the biggest milk price drops of this cycle may be over.

Published on: Apr 26, 2012

Since April 1, Class III milk futures have fallen steadily, with June showing the largest drop, reports Jim Dunn in his "Dairy Outlook" analysis released this week. Contracts at the end of the year dropped the least.

Block cheddar, butter, skim milk powder and whey all took a dive, as well, dragging

June Class III futures more than a dollar below April. The good news, says Dunn, is that futures prices aren't expected to fall much further.

The Class IV futures price for April 2012 is now $14.83 per hundredweight. The 2012 forecasted all-milk price, based on the futures prices, is for an average Pennsylvania all-milk price of $18.82, down 60 cents from his March estimate – $3.30 less than the 2011 average.

How Low Milk Prices Will Go
How Low Milk Prices Will Go

High feed costs will continue, at least until September, so margins will continue to be tight this year. Of course, fall feed prices depend on the growing season weather.

Milk Income Loss Contract (MILC) payments seem to be a certainty given the higher feed prices. Dairy export statistics remain positive, which is essential, given the rising levels of U.S. milk production.

National milk production is well above a year ago. February's cow numbers were up 12,000 from a year ago – 0.9% larger than last year at the same time.

Milk production is 4.1% above last year. Milk production estimates for Pennsylvania and New York are 1.7% and 0.9% above last year, respectively.

During the last month, the corn market has fallen while the soybean and soybean meal markets are up sharply. The May corn contract is now $6.12 and May beans are $14.47.

The soybean movement is the result of reduced acreage in the planting expectations and rumors that China is buying more soybeans. Also, drought estimates in South America are worse than last month, making our reduced acreage more of an issue.

Soybean meal futures have followed the soybean market, with May meal futures now at $406 a ton, the highest since 2008.

Penn State's measure of income over feed costs squeezed down again last month. While feed prices were slightly higher, the real cause was lower milk prices.  The net effect was that income over feed costs declined to $5.97 per cow per day, down 10% from February. The PA all-milk price was down $0.90 to $18.70 per hundredweight. 

Income over feed costs was at the lowest level since September 2009, when it was at $5.24 per cow per day. That measure reflects daily gross income less feed costs for an average cow producing 65 pounds of milk.

Mexico and Canada are our biggest export customers, with Mexico buying 24% of total dairy exports and Canada 10.9%. The next 7 largest customers are in Asia, led by China and Philippines.  So when we talk about dairy exports, our NAFTA partners and Asia are our best customers. The top 10 customers buy 72% of our exports.

For more details, catch Dunn's full report at April_Outlook.