Sunday, October 2, 2011

September prices tumble - could have been worse

The September milk and component prices were announced September 30, 2011.  While they were down significantly from August, they did not reflect the full impact of falling cheese and butter prices that have recently occurred.

Class III milk fell 12%. from $21.67 to $19.03/cwt.  Protein took the worst hit falling from $3.83 to $3.03/lb, a 21% drop.  This reflected the change in cheese prices which fell from $2.14 to $1.85/lb as measured by NASS.

It could have been much worse.  During this same time span, CME barrel cheese prices fell from a high of $2.13 in early august to a low of $1.64/lb toward the close of September.   The NASS cheese prices which typically follow the CME prices by about two weeks have not followed as predictably as history would dictate.  This will be covered in more detail below.

The two concerns mentioned two months ago in this blog appear to be happening.  The U.S. dollar has strengthened and exports are dropping.

The change has brought back a more normal balance with payment for milk protein making up nearly half of the milk check.


Since the beginning of April, the NASS and CME prices have been diverging.  The spread between CME and NASS barrel prices is favoring a higher price as calculated by NASS.  Because the NASS numbers are used to calculate the Class III milk and component prices, September milk prices did not have the full negative impact of the leading CME prices.  In-other-words, the drop in the Class III milk price could have been worse.

When prices decline, the NASS prices do not move as dramatically as the CME prices.  However, if the lower CME prices persist, NASS prices will follow as they did at the end of 2008.  The chart below shows the comparison in CME and NASS prices when the CME prices are adjusted backward by two weeks.  There is a 99.5% correlation.

What's behind these lower prices?  Continuing high inventories and falling exports.  There are reports of dropping cheese consumption, but final data is not available.

Unfortunately, the very strong export market we were enjoying has fallen in July, the latest month for which data is available.  With the stronger USD, cheese from the U.S. is more expensive on the International market.  The USD has strengthened relative to both the Euro and the New Zealand dollar.


NASS Butter prices lag the CME prices by about 1 week, but with a very tight correlation. In recent weeks, that data reports from both sources is down significantly.

When adjusted by one week, the tight relationship is even more obvious.  Based on this, NASS butter prices can be expected to fall in the next two weeks.  The butter price calculated by NASS for September was $1.98/lb.   The CME price on the last day of September was $1.645/lb.

As butter prices fall, the impact on Class III milk is minimal.  Falling butter prices lowers the component value for butterfat but increases the value for milk protein.  This was explained in  the August 8, 2010 post to this blog.

Production of butter remains robust for the last 5 reporting months.

However, even with higher production, butter stocks remain very tight, but for the first time in 2011, inventories have exceeded prior year levels.

Similar to cheese, exports of butter have fallen in the most current month for which data is available.  This data is through July only and the impact of the stronger USD is not yet visible in this data.  The stronger USD will no doubt reduce butter exports.

Based on the above facts and the trends, it is reasonable to see butter and butterfat prices continuing their decline.


Based on the most recent trends, stronger USD, lower exports, higher inventories, and lower component prices, it is easy to predict lower Class III milk prices.  The futures market sees it the same way.  Their was a little good news for dairy producers at the end of September as NASS made some surprising announcements on corn.  Inventories are higher than last expected and usage is down.  This brought the CBOT price to under $6/bushel for the first time in many months.