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

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1 Dairy Outlook January 2016 By Jim Dunn Professor of Agricultural Economics, Penn State University Market Psychology Both Class III and Class IV milk prices had a poor December. In particular butter prices took a beating. The butter price was at a seasonal high as it usually is before Christmas, while prices after the first of the year are often considerably lower. This was a situation where nobody wanted to be on the merry-go-round when the music stopped, and when it became clear that the holiday-buying demand was past, all the buyers stopped buying at those high prices and butter prices fell hard. Butter prices have crept up since, but have shown no indication of returning to the earlier high levels. Unlike butter, which dropped abruptly, cheese markets have continued to drift down, until a small Christmas rally stopped a two month decline. The dry products have stabilized, ending December almost exactly where they began it. Block cheese prices are 4.5% lower than a month ago at $1.505/lb. and dry whey is up 2%, but continuing its basement price levels of the past four months. The December Class III price of $15.52 is 5.6% lower than November, reflecting the lower cheese price, while Class IV is down 8.2% at $ Since the holiday season is now over, we are in the period where people stay at home, doing little entertaining or dining out, and the domestic demand for dairy products is slow. New Zealand s dollar is expected to fall as its Central Bank lowered interest rates. Since the U.S. Federal Reserve Bank dollar has raised interest rates slightly, the dollar is expected to rise somewhat, although the Fed s interest rate increase is only a token policy. The continuing challenges on the export front are limited buying by China and the embargo on western dairy imports by Russia. The continuing high dollar make U.S. dairy exports less competitive compared with other dairy exporters. The U.S. Dairy Export Council does not expect global dairy buying to recover until mid-2016, since worldwide inventories are so great. I estimate the Pennsylvania December all-milk price to be $18.16/cwt, down $2.14 from November and the January price to be $ The 1

2 dairy futures market prices (See Table 1) show considerably lower prices for Class III for the next few months, although rising steadily until Autumn. They average $15.26/cwt. for 2016, with the nearer months considerably lower. The Class IV futures prices show a similar pattern, with almost exactly the same average price for The December Class IV price was down $1.37/cwt. from November at $15.52/cwt., reflecting the sharp butter price drop. My forecast for the average Pennsylvania all-milk price for 2016 is $18.12/cwt., or $0.27 below the expected average of Corn and Soybean Markets Corn and soybean markets have fallen a little in the past month, although there is no new news of note. The South American soybean crops are doing well, which given the large world inventories, suggests that prices will remain low for the foreseeable future. Corn exports are also slow, so, like soybeans, corn prices should remain low. Income over Feed Costs (IOFC) Penn State s measure of income over feed costs fell by 10.5% in December, as feed prices fell, but milk prices fell by more. Figure 1 shows how these values compare to recent years. Note that the last few months are lower than the corresponding months in the past five years. December s feed cost is 4%/cow/day less than in November. December s value for IOFC of $6.88/cow/day is the lowest since summer. 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 the feed costs per hundredweight of milk production are paid. Like income over feed cost, this measure shows that the December PA milk margin was 4% lower than in November. 2

3 Milk Production The latest milk production report showed November milk production up 0.53% from a year earlier (Figure 2). This increase in milk production is small and the second smallest increase of The Midwest continues to have sizeable increases in milk production, while California and the West continue to decrease production with their drought. The Northeast is essentially und. The monthly cow numbers are shown in Figure 3. The November cow numbers were und from October. Table 1. Milk Prices and Milk Futures Prices for 2015 and 2016 (Based on futures prices of December 31, 2015) PA All PA All 2015 Class III Class IV 2016 Class III Class IV Milk Milk $/cwt $/cwt $/cwt $/cwt $/cwt $/cwt Jan $16.18 $13.23 $19.20 Jan $13.56 $13.38 $16.79 Feb $15.46 $13.82 $18.30 Feb $13.75 $13.91 $17.12 Mar $15.56 $13.80 $17.70 Mar $14.18 $14.38 $17.55 Apr $15.81 $13.51 $17.60 Apr $14.54 $14.69 $17.88 May $16.19 $13.91 $17.80 May $14.85 $14.93 $18.15 Jun $16.33 $13.15 $18.10 Jun $15.20 $15.29 $18.49 Jul $16.33 $13.15 $17.60 Jul $15.65 $15.44 $18.17 Aug $16.27 $12.90 $17.60 Aug $16.11 $16.10 $18.02 Sep $15.82 $15.08 $18.90 Sep $16.35 $16.26 $18.73 Oct $15.46 $16.43 $19.40 Oct $16.40 $16.35 $19.12 Nov $15.30 $16.89 $20.30 Nov $16.29 $16.35 $19.24 Dec $14.44 $15.52 $18.16 Dec $16.21 $16.25 $18.18 Annual $15.76 $14.28 $18.39 Annual $15.26 $15.28 $18.12 Annual -$ $ $ 7.25 Annual -$ 0.51 $ $ 0.27 % -29.4% -35.3% -28.3% % -3.2% 7.0% -1.5% 3

4 Table 2: PA Income over Feed Costs All Milk Price Feed Cost per 65 lbs. Milk Income over feed 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 $5.10 $6.67 Jul-15 $17.60 $5.14 $6.30 Aug-15 $17.60 $4.67 $6.77 Sep-15 $18.90 $4.77 $7.52 Oct-15 $19.40 $5.09 $7.52 Nov-15 $20.30 $5.11 $8.09 Dec-15 $18.16 $4.92 $6.88 Table 3: PA Milk Margin All milk price per cwt. Feed cost per cwt. Milk 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 $

5 $/cow/day 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 $10.42 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 $17.60 $7.18 $10.42 Sep-15 $18.90 $7.34 $11.56 Oct-15 $19.40 $7.84 $11.56 Nov-15 $20.30 $7.86 $12.44 Dec-15 $18.16 $7.57 $10.59 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: Milk Production 18,000 17,500 Monthly Milk 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