USDA’s monthly report on milk production costs showed higher October feed prices pushed total production costs to possibly the highest level on record, even surpassing totals seen during a previous high-cost period of 2008. Based on USDA estimates, total costs covering feed and other operating costs, as well as labor and overhead, will be up at least $2 per cwt. from 2010.

“So while 2011 milk prices will be up substantially from 2010, higher costs could eat up nearly two-thirds of that additional income,” Natzke said.

USDA’s second report provides another measurement of dairy income. The monthly milk-feed price ratio, an index comparing the relationship between the average milk price and feed costs, shrunk in November. While November milk prices held steady at $19.90 per cwt., higher corn prices offset small declines in prices for soybeans and alfalfa hay, tightening the milk-feed price ratio to the lowest level since May. 

“For dairy producers who buy feed, hay prices remain especially troublesome, more than $80 per ton higher than a year ago,” Natzke said.

“Most market analysts suggest milk prices move in a three-year cycle, and the last low point was 2009. And while 2011-12 milk prices should average well above the devastating lows of 2009, when combined with anticipated feed prices, the corresponding milk-feed price ratio could rival that seen in 2009,” he concluded.

Federal order milk prices took a temporary jump. The USDA announced the November benchmark Class III price at $19.07 per cwt., up $1.04 from October, $3.63 above November 2010, $1.88 above California’s 4b cheese milk price, and equates to about $1.64 per gallon. 

It’s the highest November price in four years and put the 2011 average at $18.33, up from $14.46 at this time a year ago and a disastrous $11.03 in 2009. But Class III futures late Friday morning portended a decline in December, to $18.61. Looking to first quarter 2012; the January contract was trading at $17.29, February $17.15, March $17.09, and April $16.95.

The November Class IV price is $17.87 per cwt., down 54 cents from October, but $4.62 above a year ago.

The NASS-surveyed cheese price averaged $1.8415 per pound, up 9.4 cents from October. Butter averaged $1.7824, down fractionally. Nonfat dry milk averaged $1.4522, down 5.9 cents, and dry whey averaged 63.8 cents, up 2.3 cents.

California’s 4b cheese milk price is $17.19, up $1.41 from October, and $4.05 above a year ago. The 2011 4b average now stands at $16.48, up from $13.25 a year ago. The 4a butter-powder price is $17.70, down 59 cents from October, but $1.36 above a year ago. The 2011 average is now $19.02, up from $14.82 in 2010.

Sellers tried to “butter up” the Chicago Mercantile Exchange the week following Thanksgiving as a possible record high 56 carloads came and went. You might say “Black Friday” for butter came on Monday when the price jumped a nickel despite 11 carloads trading hands, followed by 14 more on Tuesday, and kept coming. The first Friday of December however saw the price close at $1.63 per pound, up 2 cents on the week and 2 cents above a year ago. The NASS-surveyed price plunged 12.6, to $1.6467.

NASS powder averaged $1.4094, down 4.3 cents, and dry whey inched 0.1 cent higher, to 64.29 cents per pound.

A more typical spread between block and barrel cheese was reestablished. Monday saw a small rebound in both but gave it all back with the blocks closing Friday at $1.74, down 4.75 cents on the week but still 23.25 cents above a year ago. The barrels rolled 8.75 cents lower, to $1.7125, and 25.25 above a year ago. Only five cars of block traded hands on the week and eight of barrel. The NASS U.S. average block price jumped 6.5 cents, to $1.8886, and the barrels averaged $1.9754, up 6.8 cents.

The Monday rally in the cash dairy prices following Thanksgiving week caught the market by surprise, according to Stewart Peterson’s Matt Mattke in Tuesday’s DairyLine broadcast. Futures were factoring in anticipated further declines in cheese, he said, with some months expecting the low $1.50s. 

“Seasonally, this is still the time of the year where we should, if buyers are going to step in, this is the time of the year where they should still be looking to do so,” Mattke said, “As there’s still those end users looking to procure supplies for upcoming holidays.”

But, he wasn’t convinced the rally would hold and warned that, in the past, “When October and November are strong for cheese prices, which is pretty rare, it hasn’t been a good omen for cheese prices in the month of December.” He added that he would not be surprised if the block-barrel average fell below November lows and, worst case scenario, “We could see $1.60 cheese tested.” He said that $1.59 to $1.77 “looks like what the downside range of risk could be.”

Mattke advised producers to “Stay defensive in nearby months.

Look to the tools you’re most comfortable with whether it be futures, puts, or fences. Keep the protection nearby and in that first quarter time frame,” he concluded, but “Going beyond that I think it’s a bit early until we see some indications that the long term trend for the dairy market is turning to down. Right now we don’t see that yet.”

FC Stone dairy broker, Boris Maslovsky, said in their Nov. 28 eDairy Insider Opening Bell that consumer demand may support dairy prices. “Black Friday was a blockbuster,” Maslovsky said. “Sales were extremely strong, well above expectations and are driving equities up.

Consumer spending for televisions and other goods may filter into food markets.” However, he cautions that China’s milk imports are down by as much as half so international markets may weigh on U.S. dairy prices. 

Dairy economist Bill Brooks disagrees and said heavy consumer spending on television sets doesn’t translate into higher food demand. “I don’t believe there will be a bump in dairy prices based on Black Friday,” he said, but adds that consumer spending “could cushion price declines.”

The CME’s Daily Dairy Report (DDR) echoed the China concern reporting that, in the June to October period, China imported just 150 million pounds of whole milk powder, down 45 percent from a year ago.

Purchases are expected to pick up ahead of the Chinese Lunar New Year, which starts January 23, according to the DDR. Whole milk powder out of Oceania is priced at $1.54-$1.70 per pound, up about 7 cents since mid-October, according to USDA’s Dairy Market News.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Lee Mielke may write to him in care of this publication.