Milk Price Outlook Is For 'Guarded Optimism'

March's milk price outlook suggests rising prices into September. Returns hinge on whether corn and soybean prices slip due to higher yields.

Published on: Mar 15, 2013

Last week, Penn State Ag Economist Jim Dunn peeked into his dairy crystal ball for a look at where milk prices might be heading in the next couple months. He wasn't particularly happy with what he saw:

The Class III futures price for March is $0.31 under February's $17.25 per hundredweight. But April futures are $0.42 higher than March, at $17.36.

As of now, the March Class III futures price is projected at $16.94, the lowest projected for 2013. Right now, they look to peak at $18.75 in September and average $18.04 for the year.

Class IV milk futures milk rose to $17.75 for February, then dropped to $17.65 for March. Look for Class IV futures to average $18.06 for all of 2013.

Milk Price Outlook Is For Guarded Optimism
Milk Price Outlook Is For 'Guarded Optimism'

Dunn's forecast for Pennsylvania's all-milk average price is $21.23 per hundred for 2013. That's up $1.20 a hundred over the 2012 average, peaking at $21.74 in September.

Here's why
With spring coming on, rising milk production and no big cheese consumption periods nearby, cheese stocks are likely to stack higher. Since last month, both cheese blocks and whey have fallen about 6%. Butter followed a similar pattern, but bumped up at February's end. Over the past month, butter prices have risen 2.3% and skim-milk powder has dropped 1.8%. High inventories and disappointing disappearance makes butter prices vulnerable to softening.

While export demand may currently be okay, domestic demand is dicey, suggests Dunn. Uncertainty about the economy is still dragging on domestic markets.

Export strength factors weakening
A strengthening U.S. dollar relative to the Euro and the Australia and New Zealand dollars make our exports slightly less competitive, says Dunn. Weakening of the Australian and New Zealand dollars is tied to potential problems with China's economy.

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The Chinese government is trying to slow speculative property development in that country. If that real estate bubble bursts, it will hurt all of the world's economies and dairy markets. But Australia and New Zealand, in particular, are driven by exports to China.

Chinese citizens have lost faith in the quality of its domestic dairy production. That's why it has been the major dairy importer in recent years. Imports of skim milk powder increased four-fold from 2008 to 2012.

Where feed costs are headed
Current corn and soybean futures prices are above new crop bids based on short old crop supplies. The markets presume additional corn and soybeans will become available later in the season, due to further export declines or greater certainty that the 2013 crop will be better here and in South America.

Note: The western Corn Belt is still very dry, especially Nebraska. 

Penn State's measure of income over feed costs fell by 9.4% in February – the third straight monthly drop from November's peak of $9.10 per cow per day. February's IOFC was almost exactly the average value of the past four years.

Remember, IOFC reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Most of the IOFC change was due to a lower milk price, although the cost of feeding a cow rose by 9 cents per day to $6.10.

Alfalfa hay was up 5% and soybean meal was up 6%. Corn was down 2%. This combination raised feed costs by 1.5%. Milk prices fell 9.5%.