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 August
17, 2000
Except
for January when the Class III milk price was $10.05, Class III has
been below $10.00. But cheese prices finally strengthened during June
with 40 pound cheddar blocks increasing from $1.10 per pound (support
level) on May 30th to $1.28 per pound on June 28th, and cheddar
barrels increased from also $1.10 per pound to $1.28 per pound. The
strengthening in cheese prices increased the Class III price for July
to $10.66, a $1.20 increase from June. Normally milk production
declines seasonally during the summer, hot temperatures depress milk
composition and the yield of dairy products from 100 pounds of milk,
schools open the end of August increasing fluid milk sales, the
Southeast becomes seasonally short of Grade A milk for fluid needs and
shipments of Grade A milk from Wisconsin begins to meet these fluid
needs, and wholesalers want to be positioned with inventory of cheese
and butter to fulfill their commitments for the strong sales season of
thanksgiving and Christmas. All of these factors seasonally increase
cheese and butter prices during the summer and farm level milk prices
increase and peak in September or October often $2.00 or more higher
than their spring low. With this logic, I predicted last month a Class
III price for August well into the $11.00 range and a September Class
III in the $12.00 range. But, now these prices appear way to
optimistic. The August Class III will be lower than July, perhaps in
the low $10.00 range. September may approach $11.00 at best.
The
big question, what is keeping milk prices at these low levels and
holding down the normal seasonal increase in prices? The answer is
simply a lot of milk, butter and cheese. While cheese prices did
increase in June, the June milk production report and dairy product
production and stock reports showed that the supply side of the
picture is more than ample for market needs. June milk production was
2.9% higher than a year ago and milk cow numbers were not declining.
By August 3rd, 40-pound cheddar blocks were back down to $1.11 per
pound and cheddar barrels were below support at $1.03 per pound.
However, since then cheese prices have once again strengthened. As of
August 16th, 40-pound cheddar blocks were back to $1.28 per pound and
cheddar barrels were at $1.0875 per pound. This is a spread between
bocks and barrels of $0.1925 per pound. Such a spread is not
sustainable and either the barrel price needs to increase or the
40-pound block price will decrease. The supply and demand for barrels
appears to be more out of balance than it is for 40-pound blocks. So
there will continue to be pressure on the 40-pound cheddar block
price. As of June 30th, stocks of cheese stood at 782.3 million
pounds, 7.4% more than a year ago and butter stocks stood at 144.8
million pounds, 20.1% more than a year ago. June production of cheddar
cheese for June was 4.4% higher than a year ago as was total cheese
production.
The
release of milk production estimates for July does not offer much
optimism for stronger milk prices. Compared to a year ago, July milk
production for the 20 reporting states was 5.0% higher and production
was estimated to be up 4.8% for the U.S. This strong increase was due
to 90,000 more milk cows in the U.S., an increase of almost 1% and
excellent milk per cow, up 3.7%. Normally milk production takes a
seasonal decline during the summer. Last year milk production peaked
in May at 14.5 billion pounds and declined to 13.4 billion pounds for
July, a 1.1 billion pound decrease. But this year May production was
14.8 billion pounds and had decreased just .7 billion pounds to 14.1
billion pounds for July. Why the difference? Milk cow numbers were
increasing as well last year, but not as fast. Last year from May to
July U.S. milk cow numbers increased by 10,000 head. This year that
increase was 44,000 head. Second, for the most part weather has been
much more favorable for milk production. There have not been a lot of
very hot and humid days. Milk per cow in July was 55 pounds higher
than a year ago. Now there were some hot and humid days in the south
and west during early August. There were reports of hot and humid
conditions reducing milk production 10 to 15% for parts of California.
But weather has once again cooled off.
Relatively
strong milk prices during 1998 and 1999 along with cheap feed have led
to dairy expansions. Although milk prices are depressed, feed is cheap
and as a result the milk-feed-price ration was 3.39 for July, up from
2.91 in June and close to 3.61 a year ago. Not only are the expansion
decisions made a year ago taking place, plans for additional expansion
continue. Most of this expansion is in the West. July cow numbers
compared to a year ago for the following western states were:
California 60,000 head or 4.1%, Idaho 36,000 head or 11.0%, New Mexico
17,000 head or 7.2%, and Arizona 5,000 head or 3.7%. Increases in milk
per cow for these states were: California 6.4%, Idaho 3.4%, New Mexico
2.4%, and Arizona 7.1%. Increases in cow numbers and excellent milk
per cow lead to the following increases in total milk production:
California 10.8%, Idaho 14.9%, New Mexico 9.8% and Arizona 11.0%. This
is a lot of milk, which translates into a lot of cheese, butter and
milk powder.
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The
release of milk production estimates for July does not offer much
optimism for stronger milk prices. |
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In
the Upper Midwest, this milk expansion is not occurring. Milk cow
numbers were down 21,000 head or 1.5% for Wisconsin and 10,000 head or
1.8% for Minnesota. As a result, milk production was up only slightly
in these two states, up 0.5%. Similarly, milk expansion is not
occurring in the East. Cow numbers were down 12,000 head or 1.7% for
New York and up just 5,000 cows for Pennsylvania or 0.8%. Cow numbers
were up 3,000 head in Ohio or 1.2%. Milk production was down 1.8% for
New York, up 2.9% for Pennsylvania and 2.1% for Ohio. Weather has not
depressed milk production below a year ago in the south with
production up from a year ago 3.2% for Florida, 2.3% for Kentucky and
16.3% for Missouri. This means there is not as large of a need to pull
Grade A milk away from cheese production in the Upper Midwest to meet
deficit fluid needs in the south. One other state stands out in the
August report and that is Indiana. Indiana is not a large milk
producing state, producing just 219 million pounds of milk during
July. But this was a 21.7% increase due partially to the location of a
couple of large dairies in Indiana. Milk cow numbers were up 36,000
head in Indiana, an increase of 11.2%.
In
summary, milk prices will increase some this fall. Although the Class
III milk futures are below $11.00 for the remainder of this year, I am
still optimistic that we get into the $11.00 range. But, I am not as
optimistic with this August production report that $12.00 is possible
this year.
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