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July 2007

Michigan Milk Market Update

Christopher Wolf
Dept. of Agricultural Economics

June Class III price is $20.11/cwt. That is an increase of $8.82/cwt over a year earlier. It is also the second time that the Class III price has topped $20/cwt. Meanwhile, Class IV is $20.76/cwt, which is an all time high for either Class. The first six months of 2007 averaged $16.11/cwt for Class III, which puts it on pace to set a price record. The previous high annual Class III price was $15.39/cwt in 2004.

The high milk prices are driven by the increase in corn prices and high world dairy product prices. Over the previous 10 or so years, the corn and soybean prices have essentially been flat. There have been temporary blips (think $4/bu corn in fall 1996) but grain prices have quickly returned to low levels primarily driven by a policy that encouraged large amounts of grain production. Increases in hay prices have been the main source of a changing feed cost for the past 10 years. The new subsidies for ethanol have upset this long-run equilibrium and sent the price of corn to $3.50/bu or more. This change has pulled acres out of soybeans and hay which sends their prices higher. We have gone from cheap energy feed and expensive protein to expensive energy (competing with ethanol) and likely relatively cheaper protein feed ingredients.

In the longer term, the question is whether we are looking at a permanent change to higher feed prices– and thus a new equilibrium level in farm milk price. Figure 1 illustrates the longer term relationship between milk and feed prices. Since 1985, the milk-to-feed price ratio has averaged 2.9 and the farm milk price has changed in reaction to the feed prices to maintain this relationship. From 1985 through 1994 all milk price averaged $12.83/cwt while the period from 1995 through 2006 all milk price averaged $13.90/cwt. In the latter period, the milk price was much more volatile but for both periods the milk-to-feed price ratio averaged 2.9. If that same relationship holds, and feed prices stay where they are, the all milk price will be about $18/cwt post-2007.





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