May 23, 2016

Milk Price Recovery May be Delayed

Top Story  |   |  By: Robin Schmahl

The April Milk Production and Livestock Slaughter reports continued to show the pattern of milk production growth and dairy cow retention. Growth of milk production was anticipated, but reduced culling was a surprise. There have been a few reports of heavier culling taking place, but these may have been farm level reports from those who know of dairies that have ceased milk production and sold the cows. We know we need to view these report cautiously as many cows from dairies that go out of business end up moving to another facility rather than to slaughter.  Evidently, milk prices have not been low enough to increase the need to reduce herds up through the month of April. Dairy cattle slaughter for the month totaled 227,000 head, down 35,200 head from March and down 15,200 from a year earlier. This is the lowest monthly slaughter since August 2015. This report gave the impression that strong milk production may continue for a longer period of time than earlier anticipated. There is no doubt culling can increase substantially over a short period of time when dairies need to eliminate cows that are not paying their way and feed inputs need to be reduced. May and June slaughter reports may bear this out.

How long low milk prices will be with us is very difficult to assess. Seasonally, prices would begin to rise once spring flush is complete and buyers step up to purchase supply for increasing demand through the end of the year. This often results in peak prices being reached during September or October as demand kicks into high gear. We can only hope this will be the pattern again this year. However, current Class III milk futures show higher prices from now through December 2017. This is very unusual as futures prices generally show lower prices during the winter and spring. The anticipation here is that once a price bottom is formed milk prices are anticipated to improve over an extended period of time irregardless of seasonality. Domestic demand has remained strong so far this year, but supply has exceeded that demand. If world prices improve from either increasing demand or reduced supplies, steadily improving milk prices will be possible. There will be no reason for a seasonality of prices.

It is unlikely milk prices will slowly improve without volatility. The slow grind lower that we have experienced since the record highs in 2014 hopefully will not be repeated once milk prices improve and that those prices will be able improve more quickly. However, one category that may be an anchor of the complex may be dry whey. For every penny move of dry whey price in the weekly Agricultural Marketing Service report it mean an increase or decrease of 6 cents in the Class III price. Dry whey production has been strong due to strong cheese production. Increasing supply has kept price within a range of 3 cents since the week of September 16, 2015. This has provided little help for Class III price. Exports have been struggling and remain below the last year. Older inventory of whey is being offered at the low end of regional price ranges in the effort to move product and make room for newer production. However, despite readily available supply, buyers and sellers appear to be comfortable with current supply and demand. USDA estimates very little change in the average price from this year to next year with an average dry whey price of 25 cents this year and an average of 27 cents for 2017. Of course, this is based on the current and expected market environment and could change substantially by the time 2017 is complete.  But for now, we can only hope milk prices will not decline any more than they already have. It does appear low milk prices may remain for a bit longer than earlier anticipated given current market fundamentals.

Upcoming reports:

-April Agricultural Price on May 31

-May Federal Order class price on June 1

-California Class 4a and 4b prices

-April Dairy Products report on June 2