Enthusiasm over Higher Milk Prices Tempered by Rising Costs
Published: Friday, June 10, 2022
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
Happy June Dairy Month. While it is indeed a happier one for dairy farmers looking at milk prices, the luster fades considering rising production costs.
The May federal order Class III milk price was announced at $25.21 per hundredweight, up 79 cents from April, $6.25 above May 2021, and a new record high, besting $24.60 in September 2014 by 61 cents. The 2022 average now stands at $22.67, up from $16.91 a year ago, $15.10 in 2020 and $15.05 in 2019.
Last Friday morning futures portend a June price at $24.34; July, $24.55; August, $24.45; September, $24.34; October, $24.17; November, $23.83; and December at $23.25 per hundredweight.
The May Class IV price is $24.99, down 32 cents from April, but $8.83 above a year ago. The five-month average is at $24.44, up from $14.54 a year ago, $13.96 in 2020 and $15.81 in 2019.
The April All-Milk Price also set another record high. The USDA's latest Ag Prices report has the April milk feed price ratio at 2, down from 2.06 in March, but compares to 1.75 in April 2021.
The index is based on the current milk price in relationship to feed prices for a ration consisting of 51 percent corn, 8 percent soybeans and 41 percent alfalfa hay. In other words, one pound of milk would only purchase 2 pounds of dairy feed of that blend.
The All-Milk Price averaged a record high $27.10 per hundredweight, up $1.20 from March, eighth consecutive increase, and was $8.80 above April 2021.
Speaking in the June 6 Dairy Radio Now broadcast, dairy economist Bill Brooks, of Stoneheart Consulting in Dearborn, Mo., said the increase in the All-Milk Price was enough to offset all three input commodities, as the income over feed calculation increased for the seventh time in the past eight months. He reported the April income over feed cost moved above $13.50 for the first time since November 2014 and was above $8 per hundredweight for the seventh month running.
"Dairy producer profitability for 2021, in the form of milk income over feed costs, was $7.87 per hundredweight," according to Brooks. "The profitability was $2.37 below 2020 and $1.79 lower than the 2016-20 average. In 2021, the decrease in milk income over feed costs was a result of the milk price increasing less than feed prices rose," he said, "and income over feed was close to the level needed to maintain or grow milk production."
April's national average corn price jumped to $7.08 per bushel, up 52 cents from March, after jumping 46 cents the previous month, and was $1.77 per bushel above April 2021.
Soybeans averaged $15.80 per bushel, up 40 cents from March and $1.90 per bushel above April 2021.
Alfalfa hay shot up to a record high average of $243 per ton, up $22 from March, highest since May 2014, and a budget busting $58 per ton above a year ago.
Looking at the cow side of the ledger, the April cull price for beef and dairy combined averaged $88.10 per hundredweight, up $3.40 from March, $17 above April 2021, and $16.50 above the 2011 base average.
Brooks predicts 2023 milk income over feed costs, using May 31 CME settling futures prices for milk, corn and soybeans, plus the Stoneheart forecast for alfalfa hay, are expected to be $9.74 per hundredweight, a loss of $3.45 per hundredweight versus the 2022 estimate. 2023 income over feed would be above the level needed to maintain or grow milk production," according to Brooks.
The rise in corn and bean prices has slowed, he admitted, but "a lot of what's going on in the marketplace right now is not fundamental." Delayed plantings and other factors prompt fears of $10 corn and beans approaching $20, he said, and those conditions, plus what's happening in Ukraine, could bring that about.
Dairy margins improved over the second half of May, particularly in deferred production periods, as a combination of higher milk prices and lower feed costs increased forward profitability, according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC.
"Milk futures prices were supported by both the monthly Milk Production and Cold Storage reports," according to the MW. The MW stated, "Most of the 24 major dairy states reported lower milk production in April, compared to last year, as high feed costs, scarce heifers and regional supply management programs discouraged expansion and complement a trend of declining global milk output."
"Strong spring holiday sales and increased exports likely drew down butter inventories, according to Dairy Market News, with cream supplies tight in northeastern states in April," the MW stated. "While cheese stocks were record high in April, like butter, the monthly build in cheese from March to April was only half the most recent five-year average," the MW concluded.
Thankfully, dairy product disappearance remains strong although we wonder how long that will last, considering the rising prices. The May 27 Dairy and Food Market Analyst stated, "Average retail dairy prices are currently up a whopping 19 percent, according to scanner data firm IRI's Inflation Tracker. This is a serious acceleration. Compare to early March when retail dairy prices were up an average of 10 percent. The increase in dairy prices is outpacing the rest of grocery, with all prices up just 11 percent," according to the analyst.
The analyst adds that "USDA again raised its estimated inflation predictions for food from 5 percent to 6 percent to 6.5 percent to 7.5 percent, according to the May Food Price Outlook. The year-on-year increase in food costs is at the highest level in more than 40 years. Average prices of food-at-home are up 11 percent YoY while prices of food away from home were only up 7.2 percent."
The good news is that foodservice sales appear to be holding up. Data from tech firm OpenTable showed sales were up 4.9 percent versus 2019 levels during the last week, according to the analyst.
March U.S. total cheese disappearance topped that of a year ago for the sixth consecutive month, driven by higher performance in both domestic and export categories, according to Chicago-based HighGround Dairy.
Butter disappearance was below a year ago however for the second consecutive month, negatively impacted by weaker domestic disappearance, according to HGD, even as export shipments persisted at multi-year highs.
Dairy prices started June Dairy Month divided, but StoneX Dairy Group stated in its May 31 Early Morning Update, "There are valid concerns over a lack of fresh milk as we move into summer and Class IV milk strength."
The Cheddar blocks, after dropping a dime the previous week, fell to $2.2475 per pound last Tuesday following the Memorial Day holiday, but closed last Friday at $2.27, down just a penny on the week but 77 cents above a year ago, as traders anticipated last Friday afternoon's April Dairy Products report and Tuesday's GDT.
The barrels finished the week 5 cents lower at $2.2450, lowest since March 31, 63 cents above a year ago and a more typical 2.50 cents below the blocks.
Sales totaled five cars of block on the week and 34 for the month of May, up 1 from April. Barrels totaled 15 for the week and 61 for the month, down from 75 in April.
Cheese, Butter Production
Cheese production is steady despite continuing staff shortages, says Dairy Market News. Most milk prices were at discounts from $1.50 or more at mid-week. Cheddar producers say inventories, in some cases, are building a little more quickly than earlier in the year. Curd and process cheesemakers are trying to keep up with demand, and or shifting production to meet strengthening and seasonal demands. Market tones continue to "wobble," says DMN.
International cheese demand is strong in the West, as purchasing continues for export to Asia in first quarter. Domestic demand is steady from both retail and food service. Port congestion and truck driver shortages continue to cause delays. Cheese makers are running busy schedules as milk is ample. Some plants are running below capacity due to continued labor shortages and delayed deliveries of production supplies, according to DMN.
Butter climbed to $2.9350 per pound, equaling its Jan. 21 high, but fell back 2 cents last Friday to $2.9150, up 3.75 cents on the week and $1.14 above a year ago. Sales totaled 27 for the week and 116 for May, up from 57 in April.
Butter churning remains active, as more cream flowed into Class IV channels due to the holiday. Plant managers are more commonly reporting short staffing and, depending on the plant, total output declines based on limited plant hands have been estimated as high as 15 percent to 20 percent. Butter demand is seasonally quiet but market tones remain quite firm. Fall demand expectations, along with limited supply forecasts, have created a "bullish stirring of the market pot," said DMN.
Strong demand for cream is present in the West, as contacts reported steady to higher interest following the holiday weekend. Ice cream makers are pulling heavily on cream supplies. Churns are active, though labor shortages continue to prevent some from running full schedules. Food service butter demand is steady to lower, as some restaurateurs are reducing hours due to labor shortages. Retail demand is unchanged, though high prices continue to affect consumer buying.
Grade A nonfat dry milk got to $1.87 per pound last Thursday, highest since March 24, but closed last Friday at $1.8625, up .25 cents on the week and 60.25 above a year ago. There were 10 sales on the week and 57 for the month, up two from April.
Dry whey climbed to a Friday finish at 55.75 cents per pound, up 3.50 cents on the week but 4.50 cents below a year ago. Sales totaled two for the week and 47 for the month of May, up from 33 in April.
Global prices may be adding support to CME prices. The May 27 Dairy and Food Market Analyst said, "international prices are rising again, helped by constrained European milk production and better-than-expected demand out of China."
Uncertainty about the U.S. milk supply is also contributing strength to the CME, according to the Daily Dairy Report's Sarina Sharp. Writing in the May 27 Milk Producers Council newsletter, Sharp states, "The mercury is rising in the Southwest and the cows in Texas, New Mexico and Arizona are suffering triple-digit temperatures. But in the rest of the nation, the weather is pleasant, and milk is flowing."
She adds that the spring flush has not overwhelmed and "cheesemakers in the Midwest are able to buy quite a bit of spot milk at around $2 below Class III, but in some areas, they're paying as much as 75 cents over the market, unusual to see premiums at this time of year and raising concern about milk supplies. If driers and cheese vats aren't full to the brim amid mild May temperatures, how much will output slow in the July and August heat?" she asks.
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