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April 21, 2016

Dairy Margins Forecast Down to the $6.50/cwt Level

 |  By: Jim Dickrell

For the first time since the Dairy Margin Protection Program has been in operation, milk-feed margins could dip to the $6.50 level later this spring.

That’s based on Class III milk prices in the $13 range, and rising feed prices over the past few days and weeks. Corn prices have jumped 50¢/bu and soybeans are up $1 to $1.50/bu, partially due to weather concerns in South America.

“What that means is tighter margins,” says Bob Cropp, a University of Wisconsin dairy economist. Cropp made the comments during a monthly podcast he and fellow economist Mark Stephenson produce after every milk production report.

The 1.8% increase in U.S. milk production in March reported yesterday by USDA was not viewed as good news. What was stunning was the increase in milk production per cow over February. Milk per cow, even adjusted for leap year, was up 7 lb./cow/day. Couple that with 10,000 more cows, and it’s clear dairy farmers are not yet slowing down due to lower milk prices. (Milk per cow year over year was up 32 lb.)

“If you’ve got the feed and the replacements, and the weather has been great, I’m not surprised we’re seeing these increases,” says Stephenson. “It makes me a little concerned [about what we’ll see] when we hit the peak of the flush, not only if we’re able to handle it here in the Upper Midwest but in the Northeast as well.”

Once again, the saving grace is that domestic demand for dairy products remains robust. “Butter is going against the law of gravity,” says Cropp. While it had dropped below $2/lb., it has since rebounded to above that price break.

“When a restaurant chain like McDonald’s says they’re going to use all butter, that’s actually a big deal. That moves the needle,” says Stephenson.

So what will happen with milk prices through the rest of the year? Most analysts are pessimistic, with virtually every prognosticator unable to see Class III prices rising to $15 by year end. “It doesn’t look good because of the way production is going,” says Cropp.

“But I’m still confident that these milk prices and exports might pick up, and I have an average Class III of $15. But I’m about the only one saying it,” he says.