Dairy Outlook. September By Jim Dunn Professor of Agricultural Economics, Penn State University. Market Psychology

Transcription

1 Dairy Outlook September 2015 By Jim Dunn Professor of Agricultural Economics, Penn State University Market Psychology The world s financial markets were rattled last month by a pair of Chinese currency devaluations. The growth rate of the Chinese economy has been declining for some time and the devaluation was a response to this decline. The ongoing issues with Russia and Ukraine, the challenges of the European Union with Greece and the flood of immigrants from the Middle East and North Africa, and the inability of Congress to pass a budget that President Obama will sign have combined to create plenty of bad news for the markets. The corn and soybean crops have recovered with better weather in the Corn Belt, lowering feed prices. Of course, the strong dollar is undermining export opportunities for most agricultural products, depressing U.S. prices. The price of butter has surged in recent weeks for no apparent reason. Butter stocks are up from last year. Apparently cream is in short supply and butter manufacturers are having a difficult time getting what they need to churn butter. Skim milk powder has risen somewhat also. Cheese has d little in the past month, while dry whey continues its skid and is down by 28% in the past month. The Australian dollar is down 6.8% and the New Zealand dollar down by 5%, while the Euro has risen by 1%. These lower currency values reflect the effect of the weakening Chinese economy on Australia and New Zealand. Of course the strong dollar has a mixed effect on the dairy sector with cheaper feed but lower milk prices. Table 1 lists some past and estimated future milk prices. I estimate the August Pennsylvania all-milk price to be $18.18/cwt, up $0.58 from July and the September price to be $ The dairy futures market prices show stable prices for Class III in the rest of 2015, with much higher prices for Class IV. The Class 1

2 IV prices reflect the butter market rally. The average Class III price for the first eight months was $16.02/cwt. and the future prices for the remainder of 2015 average $ The Class III futures for the first half of 2016 average $ The August Class IV price was down $0.25/cwt. from July at $12.90/cwt. The Class IV futures prices are considerably higher for the remainder of 2015 and the first half of 2016, reflecting the new strength in the butter market. My forecast for the average Pennsylvania all-milk price for 2015 is $18.40/cwt., although far below the 2014 average, is up from recent months. Corn and Soybean Markets Corn and soybean markets have fallen sharply with the Chinese devaluation. Our domestic crop has improved as the Corn Belt weather has normalized, making the crop more typical. The markets are famous for exaggerating the effect of the weather, especially since modern corn and soybean varieties are much more resilient than past varieties. At this point the only notable weather impacts are the continuing extreme drought in the West, now including eastern Washington and Oregon as well as California. Income over Feed Costs (IOFC) Penn State s measure of income over feed costs rose by 7.8% in August, as milk prices rose and feed prices fell. Figure 1 shows how these values compare to recent years. August s feed cost is 12 /cow/day less than in July. August s value for IOFC of $6.79/cow/day is the highest since January 2015, although well below any 2014 value. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Table 2 and Figure 1 showing the monthly data follow. The allocation of the revenue per hundred pounds of milk (milk margin) is shown in Table 3. The milk margin is the estimated amount of the Pennsylvania all milk price that remains after feed costs per hundredweight of milk production are paid. Like income over feed cost, this measure shows that the August PA milk margin was 7.8% higher than in July. 2

3 Production The latest milk production report showed July milk production up 2.3% from a year earlier, but down from last month, as is typical (Figure 2). This increase in milk production is substantial, given the low milk prices and margins. The Midwest in particular is showing substantial increases in milk production, while California continues to shrink production. The monthly cow numbers are shown in Figure 3. The July cow numbers rose by 0.58%, although some states have been increasing herd size much more, especially Michigan, and Iowa. The biggest percentage s in milk production were in South Dakota and Michigan. Michigan is gaining on Pennsylvania and will soon become the fifth largest dairy state if this trend continues. Table 1. Prices and Futures Prices for 2014 and 2015 (Based on futures prices of September 4, 2015) PA All PA All 2015 Class III Class IV 2016 Class III Class IV $/cwt $/cwt $/cwt $/cwt $/cwt $/cwt Jan $16.18 $13.23 $19.20 Jan $15.68 $14.25 $18.29 Feb $15.46 $13.82 $18.30 Feb $15.65 $14.53 $18.40 Mar $15.56 $13.80 $17.70 Mar $15.74 $14.93 $18.62 Apr $15.81 $13.51 $17.60 Apr $15.69 $15.30 $18.76 May $16.19 $13.91 $17.80 May $15.90 $15.59 $18.99 Jun $16.33 $13.15 $18.10 Jun $16.15 $15.64 $19.15 Jul $16.33 $13.15 $17.60 Jul Aug $16.27 $12.90 $18.18 Aug Sep $16.14 $15.27 $19.05 Sep Oct $16.37 $16.10 $19.51 Oct Nov $16.36 $15.32 $19.20 Nov Dec $15.92 $14.32 $18.54 Dec Annual $16.08 $14.04 $18.40 Annual $15.80 $15.04 $18.70 Annual -$ $ $ 7.24 Annual -$ 0.27 $ 1.00 $ 0.30 % -28.0% -36.4% -28.2% % -1.7% 7.1% 1.7% 3

4 Table 2: PA Income over Feed Costs Feed Income All Cost per over feed Price 65 lbs. cost Month Jan-14 $24.90 $4.90 $11.29 Feb-14 $25.90 $5.00 $11.84 Mar-14 $26.70 $5.15 $12.20 Apr-14 $26.80 $5.62 $11.80 May-14 $26.20 $5.60 $11.43 Jun-14 $25.10 $5.34 $10.97 Jul-14 $25.40 $4.75 $11.76 Aug-14 $26.30 $4.54 $12.56 Sep-14 $27.40 $4.80 $13.01 Oct-14 $26.10 $4.84 $12.13 Nov-14 $24.30 $4.91 $10.89 Dec-14 $22.60 $5.14 $9.55 Jan-15 $19.20 $5.24 $7.24 Feb-15 $18.30 $5.12 $6.78 Mar-15 $17.70 $5.17 $6.34 Apr-15 $17.60 $5.15 $6.29 May-15 $17.80 $4.90 $6.67 Jun-15 $18.10 $5.10 $6.67 Jul-15 $17.60 $5.14 $6.30 Aug-15 $18.18 $5.02 $6.79 Table 3: PA Margin All milk price per cwt. Feed cost per cwt. margin per cwt. Jan-14 $24.90 $7.53 $17.37 Feb-14 $25.90 $7.68 $18.22 Mar-14 $26.70 $7.93 $18.77 Apr-14 $26.80 $8.65 $18.15 May-14 $26.20 $8.62 $17.58 Jun-14 $25.10 $8.22 $16.88 Jul-14 $25.40 $7.31 $18.09 Aug-14 $26.30 $6.98 $19.32 Sep-14 $27.40 $7.38 $20.02 Oct-14 $26.10 $7.44 $18.66 Nov-14 $24.30 $7.55 $16.75 Dec-14 $22.60 $8.06 $13.54 Jan-15 $19.20 $8.20 $11.00 Feb-15 $18.30 $7.88 $

5 $/cow/day Mar-15 $17.70 $8.23 $9.47 Apr-15 $17.60 $7.93 $9.67 May-15 $17.80 $7.53 $10.27 Jun-15 $18.10 $7.84 $10.26 Jul-15 $17.60 $7.90 $9.70 Aug-15 $18.18 $7.73 $10.45 Figure 1: PA Dairy Income over feed cost PA Dairy Income over Feed Cost yr avg 2 0 Jan Mar May July Sept Nov 5

6 mil. lbs head Figure 2: Production 18,000 17,500 Monthly Production 30 Day months ,000 16,500 16,000 15,500 Jan Mar May Jul Sep Nov Source:USDA Figure 3: Dairy Cows 9,500 Number of Dairy Cows 9, ,500 Jan Mar May Jul Sep Nov Source:USDA 6