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Natzke: U.S. dairy expansion may be slowing
By Lee Mielke

The January Federal order Class III milk price was announced Friday by the USDA at $13.39 per hundredweight (cwt.), up 2 cents from December, but 75 cents below January 2005. The Class IV price is $12.20, down 37 cents from December, and 32 cents below a year ago.

Looking ahead, Class III futures, as of late Friday morning were trading as follows: February $12.33, March $12, April $12.10, May $12.25, June $12.40, July $12.63, and August was at $12.86, with the peak at $13 in September before heading back down.

The four-week NASS-surveyed cheese price averaged $1.3895 per pound, down almost a penny from December. Butter averaged $1.3387, down 2.9 cents. Nonfat dry milk averaged 96.14 cents, down 2.85 cents, and dry whey averaged 34.16, up from 32.42 cents per pound in December.

California’s January 4b cheese milk price is $12.56, down 69 cents from December, $1.82 below January 2005, and 83 cents below the comparable Federal order Class III price. California’s 4a butter-powder price is $11.74, down 37 cents from December and 52 cents below a year ago.

Meanwhile, negative factors are lining up, in the dairy markets, according to Al Levitt, editor of the CME’s Daily Dairy Report. Speaking in Tuesday’s DairyLine, Levitt said they’ve been lining up for several months, with the latest one being the cattle report showing dairy replacement heifers expected to be around 7.28 million head, up 4 percent from a year ago and the highest since 1987. As a percentage of the total dairy cow inventory, it’s the highest ever, according to Levitt, and comes despite the border being closed to Canadian replacements.

He also pointed out that, with milk prices being as high as they have been the past two years, the incentive has been strong for producers to hang on to as many cows as they can and breed back as many as possible. He adds that we were only importing an average of 75,000 head a year from Canada so in some respects, he believes that factor has been “overplayed.”

Levitt believes cheese prices have to be close to the bottom and he agreed with Mary Ledman’s comments last week that, with the world price at around $1.25 per pound, at some point U.S. companies will find it more profitable to find markets overseas than to sell cheese to Uncle Sam at the price support of $1.13.

Looking at the powder market, Levitt said that a lot more milk has come on as cheese manufacturers have tried to cut back on production, meaning less need for powder to fortify the vat, so powder production has increased.

He added that there’s been a lot of speculation that powder prices would fall to support so, “Just like what happens to the cheese and butter market, the buyers go to the sidelines and wait to see where the bottom of this market is.”

Cash block cheese regained a little ground the last week of January, closing that Friday at $1.24 per pound, up a quarter-cent on the week, but 25.25 cents below a year ago when the block price plunged 22.25 cents. Barrel closed Friday at $1.21, unchanged on the week, but 26.75 cents below a year ago. One car of block was sold this week and none of barrel. The NASS-surveyed U.S. average block price hit $1.3528, down 1.3 cents. Barrel averaged $1.3330, down 2 cents.

Butter closed Friday at $1.2475, down 1.75 cents on the week and 39.25 cents below a year ago. Eight cars sold. NASS butter averaged $1.3164, down 3.6 cents.

Cash Grade A nonfat dry milk closed at 88.75 cents per pound, up three-quarters on the week. Extra grade held all week at 89 cents. The NASS surveyed nonfat dry milk price plunged 5.5 cents, to 92.04 cents per pound.

January’s Milk-Feed Price Ratio dropped 3 points, to 3.24, according to USDA’s latest “Ag Prices” report, and compares to 3.45 in January 2005. The All Milk price was estimated at $14.50 per cwt., down 30 cents from last month’s estimate and compares to $15.90 a year ago. Corn averaged $1.96 per bushel, up 4 cents from December’s revised estimate, but 16 cents below January 2005. The soybean price, at $5.51 per bushel, was down 26 cents from December, and 6 cents below January 2005. The alfalfa hay price, at $95.60 per ton, is down $2.10 from last month, but $1.10 above January 2005.

The House approved the Conference Budget Reconciliation bill Wednesday, February 1. Included in the legislation was an extension of the Milk Income Loss Contract payment program. The President is expected to sign it and once that happens, dairy producers will receive retroactive payments of 4 cents per cwt. for December and 10.5 cents for both January and February. National Milk’s, Roger Cryan, projects the March payment could approach 44 cents.

That decline in the Milk Feed ratio may be an indicator that the lengthy race toward dairy expansion may be slowing, according to Dairy Profit Weekly editor Dave Natzke. Speaking in his weekly Friday DairyLine report, Natzke also pointed out however that, while the ratio was down for the second month in a row, it’s still above the level considered to be conducive to expansion.

On the other hand, January’s index could be a bit deceiving, he said. Lags in the milk pricing system mean dairy product price declines in late January aren’t reflected in the monthly milk price. If feedstuff prices hold fairly steady in February, Natzke suggests that we could see a milk-feed ratio closer to or below 3.0 for the first time in seven months.

There are other factors at play, according to Natzke. Prices for energy and fuel, interest rates, and building materials are at their highest points in years, he said, adding to costs to expand and produce more milk.

Another indicator that expansion may be slowing is USDA’s quarterly report on replacement cow prices. Replacements averaged $1,840 per head in January, down about $30 from October, and the first quarterly decline in more than a year.

The expansion slowdowns appear local in nature however. Natzke reported that 14 states reported steady to slightly higher replacement cow prices and just nine states reported prices were lower. He adds that there doesn’t appear to be any regional trends.

The CWT program announced three export bid acceptances this week. One is from California Dairies Incorporated of Artesia, Calif. to export about 660,000 pounds of butter to Honduras. A second is from Dairy Farmers of America on 42,500 pounds of Cheddar cheese to Trinidad, British West Indies and a third from DFA is for 308,500 pounds of Cheddar cheese to India.

This farm news was published in the February 8, 2006 issue of Farm World.