Missouri Dairy Business Update  
Volume 6, Number 12
December 2006

Milk Prices

According to Bob Cropp's December Outlook, "Class III futures for the entire year are well above historical averages and offer dairy producers an opportunity to protect much better milk prices than experienced in 2006. Some of this optimism for milk prices this high is based on much higher corn prices due to expansion in ethanol production, and higher soybean prices as well as higher prices for good quality alfalfa hay increasing over-all feed costs. While higher feed prices are an important factor in feeding milk cows and associated milk per cow, the overall impact on milk production may be over stated. Another factor that may slow milk per cow and the growth in total milk production in 2007 is an increasing number of milk companies responding to consumers who are asking for rbST free dairy products. Less use of rbST by dairy producers would have some impact on lowering milk per cow.

With much lower milk prices for most of 2006 and higher production costs due much to high energy costs, net margins on dairy farms were squeezed in 2006. This most likely slowed new dairy expansions going into 2007 and may encourage more dairy exiting. While the November milk production report shows cow numbers again increasing, the dairy herd may still shrink some in 2007. A decline in cow numbers will be critical to much higher milk prices in 2007. There is a strong probability that the growth in milk production will slow in 2007 to less than 2%. And if commercial disappearance can also grow 1.5% to 2% in 2007, 2007 milk prices will be stronger. But, with the November milk production report I am not quite as optimistic as the Class III futures has been showing. I still see the possibility of much improved milk prices in
2007 with Class III prices between $12.00 and $13.00 January through May, reaching in the low
$13.00s by June and peaking around $14.25 in September. But, the key to 2007 milk prices will
depend on what happens in the months ahead to milk cow numbers and dairy product sales,
particularly cheese sales."

2006 Milk Futures on the Chicago Mercantile Exchange
Dec Jan 07 Feb Mar Apr
Oct Nov
Class III $13.50 $13.16 $13.27 $13.44 $13.65 $13.96 $14.08 $14.28 $14.59 $14.66 $14.34 $14.17
Class IV $12.00 $13.30 $13.30 $13.60 $13.80 $13.90 $14.00 $14.10 $14.10 $14.10 $14.20 $14.20
Butter Futures $1.24 $1.29 $1.31 $1.33 $1.35 $1.37 $1.39 $1.40 $1.40 $1.42 $1.44 $1.44

Future MILC estimates may be derived from the following formula:
($13.69 - (Higher of Class III or IV price) *$0.34)
MILC-X Fact Sheet, Payment Calculations, and USDA Details are available at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=prsu&topic=mpp-mi

Current USDA Milk Price Forecasts
4th Q 2006
1st Q 2007
2nd Q 2007 3rd Q 2007
Class III Price $12.76 to $12.96 $12.53 to $13.03 $12.36 to $13.16 $13.01 to $14.01
Class IV Price $11.85 to $12.15 $11.76 to $12.36 $11.14 to $12.04 $11.44 to $12.54
Source: USDA, ERS, Livestock, Dairy & Poultry Outlook

Historical Missouri milk prices may be found at: http://agebb.missouri.edu/dairy/mkt/index.htm

Hedging Opportunity Chart for next 12 Months http://www.uwex.edu/ces/milkmarketing/

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