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Milk Prices Should Peak This Fall

by Lee Mielke

Published: Friday, January 10, 2020

The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."

The Agriculture Department announced the December federal order Class III benchmark milk price on Jan. 2 at $19.37 per hundredweight, down $1.08 from November, $5.59 above December 2018, and the highest December price since 2007. That put the 2019 Class III average at $16.96, up from $14.61 in 2018 and $16.17 in 2017.

Last Friday morning, Class III futures portended a January price of $16.93; February, $17.04; and March at $17.25. The January price was the low for 2020, with the peak at $17.65 in September and October.

The December Class IV milk price is $16.70 per hundredweight, up 10 cents from November, $1.61 above a year ago, and the highest Class IV price since August. Its 2019 average is $16.30, up from $14.23 in 2018 and $15.16 in 2017.

Another higher All-Milk price and lower feed prices pushed the November milk feed price ratio higher for the fifth consecutive month. The USDA's latest Ag Prices report put the ratio at 2.61, up from 2.39 in October and compares to 2.21 in November 2018.

The index is based on the current milk price in relationship to feed prices for a dairy ration consisting of 51 percent corn, 8 percent soybeans, and 41 percent alfalfa hay. In other words one pound of milk today purchases 2.61 pounds of dairy feed containing that blend.

The U.S. All-Milk price averaged $21 per hundredweight, up $1.10 from October and $3.80 above November 2018. California's All-Milk price was $19.50, up 60 cents from October and $2.29 above a year ago. Wisconsin's, at $22.40, was up $1.90 from October and a whopping $5.40 above a year ago.

The national average corn price averaged $3.68 per bushel, down 16 cents from October but 27 cents per bushel above November 2018. Soybeans averaged $8.59 per bushel, down a penny from October but 23 cents per bushel above a year ago. Alfalfa hay averaged $173 per ton, down $6 from October and dead even with a year ago.

Looking at the cow side of the ledger, the November cull price for beef and dairy combined averaged $57.70 per hundredweight, down $3.20 from October, $5 above November 2018, but $13.90 below the 2011 base average of $71.60 per hundredweight.

The U.S. dairy industry saw many ups and downs in 2019, including the loss of hundreds of dairy farms, despite milk prices reaching highs not seen in five years which ironically came too little, too late for many.

I posed the question whether the supportive milk prices would remain in 2020, even as the December Class III price fell, to FC Stone dairy broker Dave Kurzawski in the Jan. 6 Dairy Radio Now broadcast.

Kurzawski began by warning, "We're in highly volatile markets right now," but he added that we need to "strip away the noise of the holidays," and the weakness that we had in December, and even the high over $2 cheese prices we saw in September, October and November.

"The question we need to think about is, where should dairy commodity prices really be right now?" he said. He believes the answer lies in looking over the previous 12 months. He reminded us that we saw tighter supplies of milk (up just .3 percent through November from 2018), less Cheddar cheese production, we saw problems on dairy farms that haven't totally been resolved, and fewer cows.

"There seems to be some stable reasons out there, even amidst these volatile milk markets that we've seen lately," Kurzawski stated, "that would suggest that prices should be higher than they normally would be as we start a new year."

He said that "the milk markets should be at a level that brings some profitability back to dairies because, while it's taken a couple of years, the signal to tighten up the supply of milk has occurred. It occurred in 2019 and probably in the later part of 2018, and I think we walk into 2020 uncertain of what demand will look like but pretty well certain that we're not going to see the spigot turn on for milk production in the U.S. any time real soon."

Meanwhile, Chicago-based Commodity and Ingredient Hedging LLC's latest "Margin Watch" (MW) reports that "Dairy margins improved over the second half of December as milk prices recovered from a mid-month swoon while feed costs held mostly steady in quiet, year-end holiday trading. Margins remain strong, above the 90th percentile of historical profitability through the first half of 2020, and over the 80th percentile of the past decade in the back half of the year. Strength in milk prices continues to be a theme supporting strong margin."

"USDA reported November milk production at 17.44 billion pounds, up .5 percent from last year with the milking cow herd in November unchanged from October at 9.33 million head, but down 27,000 from 2018. While the milking cow herd continues to decline year-over-year, efficiency has increased as smaller operations exit the business and larger dairies expand. Milk per cow during November was estimated at 1,869 pounds, which would be 15 pounds above 2018."

"Growth in milk production has been declining this past year while demand has been robust. Through November, year-to-date milk output was up .3 percent from the prior year, with much of the slowdown occurring in the second half of 2019."

EU milk collections from January through October were up only .4 percent from 2018 while New Zealand milk production lagged the prior year by .5 percent. Drought in Australia also sharply reduced milk output to its lowest level in decades."

"USDA's Cold Storage report showed November month-end cheese inventories of 1.32 billion pounds, down 2.1 percent from last year with American cheese inventories of 740 million pounds down 7.4 percent from 2018. The smaller inventories likely provided support for the CME spot Cheddar market following a recent collapse in spot barrels. November butter inventories meanwhile of 180.7 million pounds were up 17.1 percent from last year and the largest November stockpile since 1993," the MW concluded.

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