December 20, 2007

Feed prices obstruct milk expansion in 2008

Sharply higher feed costs projected for 2008, especially for soymeal, will cut into dairy producer profits in the US, according to a report released by Foreign Agricultural Service.

Offsetting higher feed costs are moderating prices for alfalfa hay and relatively high prices for milk. The milk-feed price ratio will be lower in 2008 compared with this year, and will likely slow the pace of expansion. The December Milk Production report showed November production is still increasing at above the long-term average rate. Both cow numbers and production per cow are well above year-earlier levels and sharply above those in the first half of 2007. These fundamentals should boost milk production in 2008 by about 1.1 percent. Forecast 2008 production is 190.5 billion pounds.

October output of butter, total cheese, and nonfat dry milk (NDM) continues to outpace year-earlier levels by 9.1 percent, 1.6 percent and 41.4 percent respectively, according to the November Dairy Products report. Cheddar cheese prices remain at near-record levels of over $2 a pound. The Foreign Agricultural Service reports 10- month imports of quota cheese are lagging the same period in 2006 by 3 percent. However, the Dairy Market News reports that export interest may be building. For butter, the October drawdown in stocks set a record for that month, and commercial disappearance through September was 5.6 percent above year-earlier levels. World butter prices are above US prices and could help boost export interest. Export potential for both cheese and butter, combined with firm domestic demand, will likely support prices for both products into the first half of 2008. Cheese prices could soften later in 2008.

The cheese price is expected to average from US$1.735 to US$1.745 per pound in 2007 and from US$1.640 to US$1.720 per pound in 2008. The butter price will likely follow a similar pattern, averaging from US$1.330 to US$1.360 per pound in 2007 and slipping to US$1.205 to $1.315 per pound in 2008. NDM prices soared in the second half of 2007, which will push the 2007 average price to the range of US$1.705 to US$1.725 per pound. In 2008, prices should decline somewhat to average from US$1.645 to US$1.705 per pound. Ample US production and large stocks could pressure prices later in 2008. However, global supplies remain tight. Whey prices have fallen precipitously in the second half of 2007 and will likely average from 59.5 to 60.5 cents a pound this year, based mostly on earlier highs. Next year, prices will be closer to current prices and average from 43.0 to 46.0 cents a pound. Weaker export prospects in late 2007 and into 2008 will keep whey prices below early 2007 peaks.

While milk prices should be lower in 2008 than in 2007--a steep drop is not forecast. The Class IV average price is forecast to range from US$17.40 to US$18.30 per hundredweight (cwt) in 2008, down from US$18.30 to US$18.50 per cwt in 2007. The Class III price is expected to average US$16.15 to US$16.95 per cwt in 2008, compared with US$18.00 to US$18.10 per cwt in 2007. The all milk price will average from US$18.00 to US$18.80 per cwt in 2008, down slightly from the US$19.05 to US$19.15 per cwt expected in 2007.