Dairy

July 1999 Page Two
JUNE 1999 BFP PRICE

Dr. C. W. "Bill" Herndon
Dairy Economist, MSU

May BFP Tumbles by 55 cents to $11.26

The Basic Formula Price, or BFP, fell 55 cents per Hundred weight (cwt.) in May after increasing by more than 15 percent ($1.54 per cwt.) during March and April and subsequent to the disastrous $6.00 per hundred weight (cwt.) plummet recorded in the February price report.The recent price movements clearly demonstrate that milk and dairy product price volatility continue to plague the industry, with dairy farmers bearing the brunt of this burden. Demand for fluid milk products continues to wane as more and more schools begin their summer recess periods, but milk production problems have been encountered in various locations across the country due to a earlier than normal onslaught of hot, humid weather. With milk production falling, dairy product prices have spiraled upward during June and it now appears that milk prices may have reached their low point for 1999. These hot and humid conditions have had a detrimental effect on dairy cows, especially in the Southeast and the Southwest where milk is being shipped in to satisfy local bottling needs. Florida imported 10 truckloads of milk from outside the Southeast during the third week of June marking the first week in 1999 that supplemented milk was needed in the state, which was well behind the pace of milk imports required in previous years. Milk output in the Northeast, Upper Midwest and Pacific Northwest have reached their seasonal peaks and milk supplies are expected to ebb during the reminder of the summer and fall. Despite declining demand for fluid milk products, deteriorating milk supplies have overshadowed the dairy market and cheddar cheese prices have rebounded sharply since mid-May. These upward movements in cheese prices indicate that farm milk prices should in-crease through the reminder of this summer and reach their usual annual high sometime this fall, probably in October or November. The May BFP was reported at $11.26 per cwt. which represents a DECREASE of 55 cents per cwt. (-4.7%) BELOW the April BFP of $11.81. This year's May BFP is 38 cents per cwt. (or +3.5%) HIGHER than the May 1998 BFP price of $10.88. Dairy producers need to remember that the May BFP will be used as the base price to calculate the July Class I and Class II milk prices and the May Class III milk price. Because about 80 percent of Mississippi milk is utilized as Class I and Class II products, farmers will not realize any reduction in revenues caused by this 55-cent decline in the May BFP until they receive their "settlement" checks in mid-August as payment for milk sold in July.

Milk Production

Record high prices experienced during late 1998 continue to fuel substantial increases in national milk production. Through the first five months of 1999, milk production in the U.S. was 3.5 percent (+2.327 million pounds) greater than the same period of last year with the western states again leading the way with percentage increases approaching double-digit figures or greater. The USDA reports that May 1999 milk production was also 3.5% higher than May 1998 where dairy farmers produced 487 million pounds more this May because of persistent mild temperatures and the availability of high-quality forages continue to boost milk output per cow by almost 55 pounds per cow between these two months. Comparing May 1999 to May 1998 for the 20 states for which the USDA reports monthly milk production statistics, the states recording the largest percentage increases were Idaho (+9.8%), California (+9.6%), Arizona (+9.1%), New Mexico (+6.7%), and Florida (+3.7%). Of the 20 reporting states, those states reporting decreased output were: Kentucky (-5.1%), Illinois (-5.2%), Missouri (-5.0%), Ohio (-2.8%), Indiana (-2.6%), Iowa (-1.8%) Virginia (-1.2%) and Texas (-0.8%). These data confirm that the Southeast and the Midwest -- especially, the Corn belt states - are suffering through a period of adjustment in their milk production sector where fewer dairy farms and milk fewer dairy cows are producing less milk supplies. Milk production is shifting to the western states listed above as the dairy industry migrates to locations with ample and relatively low-cost, high-quality forages which also have more favorable weather conditions for dairy cow comfort and health. Clearly, it is not only the Southeast that is suffering through this period of dairy industry adjustment as other regions of the country attempt to adapt to the dynamic elements which are shaping the U.S. dairy industry.

Dairy Product Prices

The increased milk supplies which have characterized the 1999 dairy market have caused a general downturn in dairy product prices. However with the exception of nonfat dry milk, cheese and butter prices have been remarkably resilient during 1999. The upturn cheese and butter prices witnessed in mid-May have continued to either increase or stabilize during late-May and early-June with the strength in the dairy product prices being fired by strong cheese demand and declining milk supplies. During the third week of June, the cheese market was described as "firm" with orders exceeding production and lead times for delivery of product increasing while the butter market was "unsettled" because quantities being held in cold storage appear to be excessive given current prices. Cheese prices on the Chicago Mercantile Exchange (CME) both 40# block and barrel prices increasing, while maintaining a somewhat normal price spread of about four cents per pound. On the CME, 40# block prices were reported at $1.5000 per pound on June 25 compared to $1.2300 on May 21--indicating a 27-cent (+22%) increase over this period while barrel prices rose 26.75 cents from $1.19 on May 21 to $1.4575 on June 25. More importantly, strength in cheese prices appears to driven by a continuation the long-term trend of increasing per capita consumption for cheese products. During this same five-week period, CME butter prices increased sharply during the final two weeks of May and have since stabilized during early and mid-June. On May 21, the Grade AA butter price was recorded at $1.3250 compared to $1.4800 on June 25 -- an increase of 15.5 cents (+11.7%) per pound. Nonfat dry milk (NDM) prices on the CME remained flat because the current market prices have been at the government price support level, as illustrated by the fact that Grade A NDM prices have been reported at $1.0500 since February 19 (for 20 straight weeks). The USDA's Commodity Credit Corporation (CCC) continues to increase the amount of its weekly purchases which have ranged from 5.5 to almost 12 million pounds during this recent five-week period with a small amount of fortified NDM purchased in early June, marking the first CCC purchase of fortified NDM since 1992. The CCC has already purchased a total of 138 million pounds of NDM in 1999 compared to 103 million pounds over the same period of 1998. The NDM market remains "weak" but DEIP sales are helping some amounts of dry milk products clear market channels. NDM prices are expected to remain at the support levels over the next several months because milk production is "heavy" with NDM market offerings described as "balanced or more than ample."

Near-term Market Outlook

The outlook for the dairy market over the next several months is somewhat positive with the market indicating that milk and dairy product prices should increase over the next several months. But, heavy milk supplies in the western states are troublesome and a extended period mild weather conditions could promote more milk production that could dampen the positive outlook for milk prices. Dairy market analysts are of the opinion that milk and cheese prices have already experienced their lowest levels for 1999 and expect the BFP to increase over the next four to five months.

Therefore, the June BFP is expected to be $11.50 to $11.60 then steadily increasing over the next quarter and reaching a peak of $14.00 by September or October. On June 24, BFP futures contracts settlement prices were $14.01 for August and $14.05 for September. However, history (including what happened with the $6.00 plummet of the February BFP) clearly demonstrates just how sensitive milk prices are to demand and supply conditions in the dairy market. This price volatility places tremendous business and financial stress on dairy farmers who must strive to plan their dairy operations and manage huge changes in the size of their monthly milk checks.

Status of Dairy Policy Issues on Capital Hill

On March 31, the USDA announced the Final Rule which outlines its plans for Federal Milk Market Order (FMMO) reform. Subsequently, three "basic" concerns have been raised by various sectors of the dairy industry about specific aspects of the Final Rule. First, the Final Rule proposes the adoption of a "modified" Class I price differentials scheme and pricing surface, called Option 1-B, which reduces milk prices and dairy farm revenues in most regions of the country. Most of the industry expressed strong support for the Class I pricing scheme described as Option 1-A which would maintain differentials similar to those employed, currently. Second, the Final Rule calls for the elimination of all dairy product price supports effective January 1, 2000. Segments of the dairy industry wants to extend this deadline by three years and schedule ending dairy price supports on January 1, 2003. Third, the dairy industry is worried about the Class III price "mover" proposed in the Final Rule which would decrease the basic price for milk used to make cheeses by an average of 40 cents per cwt. below the current Class III price, or the BFP. Dairy producers and processors, alike, want the USDA to hold "formal" hearings to discuss how Class II, Class III and Class IV milk prices are to be calculated under dairy price and policy reform. A fourth issue not directly related to the Final Rule is the ratification of the Southern Dairy Compact and the continuation of the Northeast Dairy Compact. More than one-half of the 50 states have expressed an interest in having the right to form dairy compacts. These dairy farmer and processor concerns have resulted in several pieces of legislation being introduced and numerous hearings held in the U.S. Congress over the past several months.

As of mid-June, the latest news from Capital Hill is that most of the concerns listed above have been combined in a joint Senate-House bill, called S.J. Resolution 22. This legislation calls for a dairy amendment added to the FY 2000 Agriculture Appropriations bill and would: (1) Extend the Northeast Dairy Compact until 2002 and ratify the Southern Dairy Compact as a pilot program until 2002; (2) Mandate that the USDA adopt Option 1-A as the pricing formula used for Class I milk; and, (3) Require the Secretary of Agriculture to use the formal rule making process to determine how to calculate Class II, Class III and Class IV milk prices. Support for this amendment seems to be building in the U.S. Senate where, as of June 21, 45 Senators have signed on as bill co-sponsors and several other amendments are being attached to this bill which are designed to provide disaster relief for most sectors of agriculture, including dairy farmer.

Southeast F.O. #7 "Blend" Price Rebounds to $14.03 in May

The Southeast Federal Order Milk Market Administrator reported the May 1999 "blend" or uniform prices for milk delivered in Federal Order (FO) #7 at $14.03 per cwt. (for 3.5% Butterfat milk) in Zone 7, see the Mississippi map for zones (Zone 5 minus $0.25, Zone 6 minus $0.10, Zone 8 plus $0.10, Zone 9 plus $0.20, Zone 10 plus $0.32, Zone 11 plus $0.50, and Zone 12 plus $0.57 per cwt.). The May "blend" price of $14.03 for Zone 7 of FO #7 represents a INCREASE of $1.03 per cwt. (+7.9%) compared to the April price of $13.00. The May 1999 blend price is $1.01 (or -6.7%) BELOW the May 1998 blend price of $15.04. This $1.03 per cwt. increase in the May blend price occurred because both the Class I and Class II milk prices went up by $1.35 per cwt. and despite a decrease in the Class I utilization rate (and corresponding increases in the Class II and Class III utilization rates). Class I utilization fell 4.2% (from 80.8% in April to 76.6% in May), while Class II utilization rose 3.0% (from 6.6% in April to 9.6% in May) and Class III utilization increased by 1.2% (from 12.5% in April to 13.7% in May). The May Zone 7 "blend" price was calculated using: (1) the March BFP price of $11.62 plus the $3.08 Zone 7 Class I differential for a Class I price of $14.70; (2) the March BFP price of $11.62 plus the 30 cents per cwt. Class II differential for a Class II price of $11.92; and, (3) the May Class III price of $11.26 (which is the BFP). Please consult the map in this newsletter to determine which Zone the plant you sell your milk to is located in FO #7. A dairy producer's uniform price and the amount of his milk check is affected by where the plant that processes his milk is located in the Southeast FO and NOT by where the milk was produced on the dairy farm.

UNIFORM or "BLEND" PRICE FOR MAY 1999

ZONE 5:

$13.78

ZONE 9:

$14.23

ZONE 6:

$13.93

ZONE 10:

$14.35

ZONE 7:

$14.03

ZONE 11:

$14.53

ZONE 8:

$14.13

CLASS 1 PRICE FOR JULY 1999 (using May 1999 BFP)

ZONE 5:

$14.09

ZONE 9:

$14.54

ZONE 6:

$14.24

ZONE 10:

$14.66

ZONE 7:

$14.34

ZONE 11:

$14.84

ZONE 8:

$14.44

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