Here's a quick take on July's dairy outlook from Jim Dunn, dairy economist at Penn State University:
Cheese, whey, butter and powder markets have been circling since May with little real price-impact on milk. At $21.40 per hundredweight, June's Pennsylvania all-milk price was $0.40 higher than May. June's Class III price was $0.50 lower than in May, at $18.02. The Class III futures price for July is $0.78 lower at $17.24.
Class III futures prices for the rest of 2013 are have lost ground since last month, averaging $0.75 lower than at this time last month. The June Class IV price was $18.88 – down a penny from May. July's Class IV futures price is $19.10, and is projected to average 19.09 for the rest of 2013.
Nationally, milk production has been rising through June, compared to last year. But July production likely will be lower, contends Dunn. The extreme heat in the Southwest will hurt production.
Based on the futures prices, Dunn's forecast is for a 2013 Pennsylvania all-milk price average of $21.36 –about $1.33 per hundred more than 2012.
U.S. has export edge
Record cheese inventories put the squeeze on Class III prices, notes Dunn, but adds that dairy product manufacturers aren't particularly bearish about the prospects for cheese. One reason – a big wild card – is lower exports from Australia and New Zealand. They and all of the other exporters have lower production. So U.S. export opportunities for cheese should be good.
In 2009, American dairy exports collapsed as the very strong dollar made us uncompetitive. Since then our exports have been much greater, with 2013 setting a record so far. The improvement in the relative exchange rates was an important part of that.
Keep in mind that the U.S. dollar has recently been up in the past month against the Euro and the New Zealand and Australian dollars. All three are off by at least 2% since a month ago, with the Australian dollar especially weak.
Corn and soybean impact
Nearby corn markets have been steady as recent news about corn inventories have been below market expectations, while 2013 harvest prices have fallen sharply. Barring an abrupt weather change, the 2013 corn crop should be a record, says Dunn. That spells lower prices and sizeable inventories going into 2014.
December corn futures are $4.91 a bushel, while the July contract settled at $6.85. The soybean situation is similar. July soybean futures contract is at $15.88 a bushel, and November 's contract settled at $12.28. Soybean meal reflects the same situation.
Income over feed costs rising
Penn State's measure of income over feed costs rose by 7.4% in June – up 56 cents per cow per day, to $7.97. That's above the June average of the past four years. Most of that increase came in lower feed costs.
Both alfalfa hay and soybean meal fell by more than 8% from the previous month, while corn prices rose only slightly. With record corn and soybean production, Dunn expects milk margins to increase.
Dairy stabilization policy?
As you already know, the U.S. House of Representatives voted down the Farm Bill last month. Internal disagreements in the Republican majority led to a major defeat of the bill.
Supposedly, they will revisit the bill soon. But a week off won't change the underlying disagreement. There's even talk of splitting the farm programs from the nutrition programs to get the bill out of the House.
The dairy stabilization program is a significant point of disagreement. That said, it seems unlikely that proposed supply controls will be in the final bill.