July 4, 2019

Milk Price Improves In Time For Higher Feed Costs

 |  By: Ben Laine

There are many reasons to be optimistic about milk prices right now. Good domestic demand and below-trend supply have been supporting prices for months. Tempering the mood, however, is the prospect for squeezed margins later this year due to the flooding and wet weather happening across the corn belt that could drive up feed costs. 

So far in 2019 milk production has been below trend. Some months have been slightly below a year earlier, others slightly above. In May, U.S. milk production was just over 19 billion lb., representing a 0.4% decrease from May 2018.

A smaller national herd and a below-average increase in milk per cow are driving the production decrease. Cow numbers are still down by 89,000 head in May compared to a year ago, but that decrease is starting to level out. The herd increased by 5,000 cows between April and May, mostly in the Southwest. Rabo AgriFinance expects cow numbers to continue to climb from here, but concerns about feed quality, availability and cost due to the wet weather could temper some expansion plans and keep output per cow below trend. 

Farmers receiving indemnity payments for prevented plantings will be able to plant forage crops (including corn silage) without penalty. This could help with forage availability, but quality could still suffer, which will likely have negative implications on milk per cow yield. 

The Midwest lost the most cows and overall production, and that is tightening markets for milk going into cheese. Stocks of American-style cheese were 784.8 million lb. at the end of May. This is a negligible increase of about 2 million lb. from April and down by more than 19 million lb. from a year earlier. Notably, stocks fell 18.8 million lb. since the end of January, while the January-to-May inventory build averaged a 78-million lb. increase in 2017 and 2018 by comparison. 

All of this has led to steadily increasing cheese prices this year, with futures showing expectations of more strength to come. Class III futures are currently over $17/cwt across the second half of the year, which represents an increase of more than $3 in some months compared to 2018. Suffering a double blow from Chinese tariffs and reduced demand for pig feed due to African Swine Fever sweeping through China and Southeast Asia, whey, meanwhile, continues to be a limiting factor keeping the Class III price from reaching its full potential. 

Butter supplies have tightened modestly as well following a muted spring flush. Slowing milk production overall limited the need for processors to move surplus milk into butter and powder balancing plants this year compared to the recent past. 

Weather and trade will be the major risks to watch for the remainder of the year, as well as managing feed costs relative to margins. While domestic demand has been strong, exports struggle to maintain the same strength. But, solid domestic demand taken in combination with below-trend production and tightening inventories are all reasons to be optimistic about the milk price outlook in the months ahead.