Weekly Dairy Market Outlook

By Ken Bailey

Penn State University

December 20, 2004

Cheese and Butter Prices Weaken

· Blocks fall 29 cents/lb

· Butter dropped 32 cents/lb.

· Nov milk supply grew just 1.2 percent

There was market movement last week at the Chicago Mercantile Exchange. Block cheese prices fell $0.2865 from the previous week to $1.4365 per pound for the weekly average. Barrel cheese fell $0.2425 to a weekly average of $1.3950 per pound. Butter prices also softened last week. Grade AA butter fell $0.3167 from the previous week to $1.55 per pound.

The drop in cheese prices was not unexpected. There was no good explanation as to why cheese prices shot up to nearly $2 per pound. The decline was more of a market adjustment. Cheese prices found a floor at around $1.40 per pound. What was unexpected was the sudden drop in butter prices. USDA reported that most butter for holiday shipment has already been committed. However, the market fundamentals for butter would suggest tightness in the market. One explanation for the recent drop in butter prices could be that the market is expecting a lot more butter to be processed this month. USDA reported that the high December Class III price and the now lower cash cheese price will make cheese processing in December unprofitable. Of course this occurs because of the unnecessary lag in the NASS cheese price survey. Thus processors will move surplus milk into butter/powder production, increasing butter production.

Prices for nonfat dry milk are much higher than expected. Western prices for low/medium heat nonfat dry milk sold for $0.86-$0.90 per pound for the week December 13-17. This is above the support price of $0.80 per pound. However, this is below the world price of around $1 per pound. There were no purchases of surplus nonfat dry milk under the Dairy Price Support Program during this week.

USDA also released the November milk production report. Milk production in 20 select states was up just 1.2 percent from a year ago at 11.8 billion pounds. Milk per cow for 20 states was up 9 pounds from a year ago at 1,526 pounds. And the number of cows in 20 states was level with a month ago at 7.77 million head. Milk production in Arizona was up 7.6 percent from a year ago. California and Idaho milk production was up 4.9 and 4.6 percent, respectively. And Ohio was up 4.8 percent. This was offset by declines in other states. The market will interpret this as neutral information. In other words, it won’t impact current expectations of where milk prices will move.

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