Friday, October 5, 2012

Milk Prices hit $19

On October 3, September Class and Component Milk Prices were announced.  Class III prices were exactly $19/cwt up $1.27 from the prior month.  During the last month, prices for cheese, butter, and dry whey have moved up rapidly, positively impacting all the dairy financial statistics concerning milk revenue.

The increases are positive for improved dairy cash flow, but high dairy milk prices can also have a long term negative impact on consumption.  The first section below analyzes the impact of high milk prices on retail cheese prices which in turn negatively influence consumption.

The 8% increase in butter prices vs. the 5% increase in cheese prices held protein to only a 4% gain.  This relationship can be reviewed in the August  8, 2010 post to this blog..

All three component prices are running above their historic levels.  As Chart 2 shows, the value of other solids is becoming a factor.  The other solids value is calculated based on dry whey prices and is therefore linked to cheese production and whey demand.

Payment for protein remains the dominant part of the milk check.  This relationship has been consistent for a long time and reinforces the growing importance of cheese as well as the need for higher levels of milk protein.  The producers' best strategy is to do everything possible to increase protein production.

Why is $20/cwt milk not good for the dairy industry?

In 2007, when milk prices reached $20/cwt, producers received a nice bump in their revenue line.  As we know, this was quickly followed by a severe drop in milk prices.  Part of this was the sudden changes in exchange rates which negatively impacted the U.S. export competitiveness, but there was also a negative impact on domestic consumption which decreased demand for cheese.

As can be seen in Chart 4, the high milk prices forced cheese makers to increase their prices which of course led to an increase in the retail price of cheese.  That increase resulted in a drop of 2%  in per capita consumption which has never recovered. 

Following the 2008 drop in consumption, the long term trend of increasing cheese consumption continued but at a slower rate as illustrated in Chart 5.  There have been additional price increases in 2010 and 2011.  The drop in consumption and the slower growth rate now account for a 5% decrease in domestic consumption as compared to where consumption would be if the growth trend prior to 2007 had continued.

The conclusion is obvious.  High prices for milk will dampen demand in the long term and therefore hurt long term demand for dairy products.  This leads to increased volatility in milk prices. 

Because the price of Class III milk is linked closely to the price of cheese (see blog post for April 23, 2009), everything that influences the price of cheese directly influences the price of milk.

The remainder of this post covers movements in the parameters that determine the price of milk (August 8, 2010 post).  The most impactful is cheese, followed by butter, and dry whey.  They will be reviewed in that order.


The NASS cheese price for September was $1.86/lb, an increase of $.10 from the prior month.  That is certainly not a high, but the early October prices on the CME are approaching record highs, with cheese blocks reaching $2.09/lb.  The NASS prices typically follow the CME prices with about a two week lag.  This relationship was covered in the October 2, 2011  post to this blog in the cheese section.  Based on current CME prices, it is likely that October will see another significant increase in cheese prices.

Inventories of cheese fell at the end of September.  Charts 7 & 8 show this inventory drop graphically. The tighter inventories will also be contributing to increased prices in October. 

Unfortunately export data for August and September is not yet available.  The export data through July shows record levels of exports.  With a weakening of the USD in August and September,   exports should be even higher than in the last reporting month of July.

The near term future for cheese prices is very positive.  However, higher retail cheese prices are a concern because they will cause a future drop in demand.


Butter prices for September were $1.83/lb, an increase of $.13 over the prior month.  October prices on the CME are currently $1.91/.lb, so barring underlying changes, the butter price for October will probably show another increase.

Butter inventories are continuing to tighten as shown in Chart 11.  

And butter production keeps increasing but can't seem to keep up with demand.

Exports are the drivers of increasing demand.  The very high levels of exports in 2008, caused inventories to be low and prices shot up as a result. Inventories are again increasingly tight and spikes in exports may again deplete stocks.

Other Solids

The price for other solids increased more than any other milk component.  The 15% increase was driven by the price for dry whey which was up 9%.  Whey exports remain high as shown in Chart 13.

Whey inventories have been declining for 5 years putting upward pressure on the price of dry whey.  

As a result, the value of other solids has increased to a respectable $.40/lb.

The Future

Exchange rates are favorable for exports, inventories of cheese, butter, and dry whey are low and the CME prices for all dairy products are increasing.  It certainly looks like milk component prices will show additional increases in October. 

The current high feed prices will probably keep producer margins positive but not excessive.  When prices reached $20/cwt previously, there was a significant increase in the number of cows which contributed to oversupply and very low prices the next year.  While high feed prices are not positive for the producer, they should have the impact of keeping cow numbers within reason.