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Despite Decline, November Milk Price Is Highest Ever for That Month

by Lee Mielke

Published: Friday, December 14, 2012

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

Farm milk prices have peaked for 2012. The Agriculture Department announced the November Federal Order benchmark Class III price last Wednesday at $20.83 per hundredweight, down 19 cents from October but still $1.76 above November 2011, a whopping $2.35 above California's comparable 4b cheese milk price, and the highest November price ever. It equates to about $1.79 per gallon.

The 2012 average, now at $17.33, is down a dollar from this time a year ago and compares to $14.46 in 2010 and a disastrous $11.03 in 2009. Look for a big drop ahead. The December Class III futures contract was trading last Friday morning at $18.50. January was at $17.90; February, $17.99; March, $18.22; and April at $18.32. The November Class IV price is $18.66, up 12 cents from October and 79 cents above a year ago.

The AMS-surveyed cheese price averaged $2.0146 per pound, down 3.3 cents from October. Butter averaged $1.8410, down 7.6 cents. Nonfat dry milk averaged $1.5143, up 5.1 cents, and dry whey averaged 64.8 cents up 2.8 cents.

Dairy Profit Weekly reported that a record-tying U.S. average milk price wasn't enough to drastically improve the monthly milk-feed price ratio, but November's index did represent the fifth consecutive month of small improvements, according to USDA's latest Ag Prices report.

Milk-Feed Price Ratio

The higher milk price, combined with slightly lower corn and soybean prices, helped push the preliminary November milk-feed price ratio to 1.79, the highest since last December. However, it remains below a year ago, and marks the 20th consecutive month below 2.0. The index is based on the current milk price in relationship to feed prices for a ration of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. At $22.10, the preliminary November U.S. average all-milk price equals a record high set last August, according to DPW.

Average corn ($6.71 per bushel) and soybean ($13.80 per bushel) prices were the lowest in five months, but dry alfalfa hay prices ($215 per ton) returned to the 2012 high set last May. USDA says the average annual milk-feed price ratio was 1.88 in 2011 and 2.26 in 2010.

The cash cheese market was mixed the first week of December. The 40-pound blocks closed the first Friday of the month at $1.76 per pound, unchanged on the week but 10½ cents above a year ago. The 500-pound barrels closed at $1.66, down 5¼ cents on the week, 8¾ cents above a year ago when they plunged 14 cents to $1.5725, but are 10 cents below the blocks. Only five cars of barrel were sold on the week. The AMS-surveyed, U.S. average block price lost 7.7 cents, hitting $1.9197, while the barrels averaged $1.8373, down 7.9 cents.

Cheese plants were busier as extra manufacturing milk was available over the Thanksgiving holiday and long weekend, according to USDA's Dairy Market News. The lower cheese prices have buyers ordering to refill store shelves after the holiday. Retail sales were reported as good. Recent price declines also helped spark interest into aging programs, according to DMN.

Cash butter inched up a half-cent last Wednesday, reversing 12 consecutive sessions of loss. Butter added another half-cent last Thursday, and closed last Friday at $1.59, still a penny below the previous week, the fourth week of decline, and a nickel below a year ago. Twenty cars found new homes on the week. AMS butter plunged 14.6 cents, averaging $1.7088. AMS powder averaged $1.5310, up 1.1 cent, and dry whey averaged 65.7 cents, up .3 cent.

Churning over the Thanksgiving holiday was seasonally strong, according to DMN, as surplus cream was plentiful. Milk handling returned to normal following the holiday and Class I orders were increased as schools and colleges resumed.

Milk production in the Southwest is following the recent theme of incremental week-to-week increases but trailing year ago levels. Pacific Northwest output is also below last year, attributed to fewer cows and less output per cow. Milk volumes are steady in Utah and Idaho. Seasonal milk production patterns are prevalent across the Midwest with milk component tests steady to slightly higher. Milk is being moved around to balance dairy product inventories and maximize returns. Northeast, Mid-Atlantic and Southeast output is increasing marginally, yet trending below a year ago.

Milk Sales

Commercial disappearance of dairy products in the first nine months of 2012 totaled 151 billion pounds, up 2.1 percent from 2011. Butter was up 3.1 percent; American cheese, up 2.2 percent; other cheese, up 2.2 percent; nonfat dry milk was up 27.9 percent; but fluid milk products were off 2.2 percent.

Jerry Dryer commented on the fluid sales in his Nov. 30 Dairy and Food Market Analyst: "Part of the decline was driven by school milk sales or more appropriately, the lack of chocolate milk sales, as many school districts banned or limited chocolate milk at the beginning of this school year. Sugar was the culprit, not the milk. Unfortunately, kids have a strong preference for chocolate."

Poor Wheat Crops

We mentioned the drought here a few weeks ago, something we haven't heard much about in the major press for a long time, but its effect is still with us. The Nov. 30 Daily Dairy Report pointed out that the U.S. winter wheat crop is entering dormancy in the worst condition on record. DDR analyst Sarina Sharp talked about it in the Daily Dairy Discussion on the DDR web site.

She reported that only 33 percent of the crop is in good or excellent shape, compared to 52 percent at this time last year. The Plains states are still struggling with severe to extreme drought, and in the driest areas, an alarming portion of the crop has not emerged. She reported that only 60 percent of South Dakota's wheat crop has emerged, compared to 100 percent a year ago. Much of the seed that has not emerged likely has blown away in the dust.

Wheat could deteriorate further under cold, dry conditions, according to Sharp. Dormant winter wheat is typically insulated from damaging cold by snow cover. But there is little moisture in the forecast, and this year the crop could be unprotected. A lack of winter moisture could extend the devastating drought into the start of the next crop year.

She said it's too early to assume this dryness will persist until spring but warned that feed prices will be highly sensitive to any indication that the Corn Belt is facing a multi-year drought. A large crop is needed to replenish stocks or end users will face another year of demand rationing and record-high grain prices.

Lingering drought could also restrict the supply and quality of forage and increase competition for limited supplies, according to Sharp, and "The quality of forage used in dairy cow rations has a significant impact on production.

"Dairy producers will likely have to pay a considerable premium for good-quality forage if drought continues, and milk production per cow could suffer."

She added, "As the drought reduces winter pasture available for beef cattle, more cattle will be placed on feedlots and consume purchased forage. Dairy producers will be forced to compete for these supplies."

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