Dairy Situation and Outlook, October 18, 2007

USDA’s release of September milk production showed that milk production continues to run well above year ago levels. September milk production was 3.1% higher than last year. Since July, increases in milk production have been more than 3% compared to increases well below 2% from January through June. Dairy producers are responding to much higher milk prices by herd expansion and increased milk per cow.

Compared to September a year ago, milk cow numbers for the 23 states were up 91,000 head or 1.1%. Compared to the month before, milk cow numbers have increased every month starting with May. September milk per cow was 1.9% higher compared to increases of about 1% earlier in the year.

Compared to a year ago September, California had a strong increase in milk production, up 3.3%. Other relatively strong increases were: Arizona 9.9%, Michigan 8.0%, Texas and Colorado 6.5%, Idaho 6.0% and Iowa 5.6%. Wisconsin and Minnesota also continue to show growth in milk production with increases of 3.3% and 2.9% respectively. New York experienced a 2.9% increase while Pennsylvania had a 1.2% decrease. Florida has been experiencing a decline in milk production but improved milk per cow resulted in September production up 1.4%.

While milk production is increasing cheese prices may still decline slowly during the last two months of the year due to the tightness of cheese stocks. CME cheddar barrels were $2.1325 per pound on September 12th and have declined to $1.8775. CME 40-pound cheddar blocks were $2.1625 per pound on that date and have declined to $1.8550. The latest stock report showed August 31st stocks of American cheese were 3.1% lower than a year ago and the stocks of total cheese 1.7% lower. Cheese sales have been favorable while cheese production has been below year ago levels. August production of cheddar cheese was 3.9% lower than a year ago and the production of all cheese was 0.1% lower. The latest commercial disappearance report showed that for the period of January through July, compared to a year ago, American cheese sales were up 1.0% and other varieties of cheese up 5.1%. Reports from the industry since then indicate that cheese sales up to this point continue to be favorable as wholesale and retail buyers position themselves for the strong sales period of Thanksgiving through Christmas.

The story is different for butter. Compared to a year ago, August butter production was up 23.6% and August 31st stocks were up 21.1%. CME butter was $1.51 per pound in early August, declined to $1.42 per pound early September and is now $1.29 per pound. With these levels of stocks we can’t expect much price increase, even for increased butter sales during the Christmas holidays.

Nonfat dry milk prices remain fairly steady around the $2.00 per pound level. Dry whey prices, which were near $0.080 per pound earlier this summer, have declined to around $0.42, but are firm at this level. Dry whey prices may hold at this level for sometime while we can expect some weakness in nonfat dry milk prices towards year’s end and into 2008. California, which produces about 50% of the nonfat dry milk, has moved more of its increased milk production into the production of nonfat dry milk. Compared to year ago, the U.S. production of nonfat dry milk for August was up 40.7%.

As milk production continues to increase both seasonally and compared to year ago levels, we can expect milk prices to decline for the remainder of the year. With the high milk prices experienced thus far milk cow numbers will likely stay above year ago levels and into 2008. Milk per cow is likely to continue to increase around 1.5% or more. While corn prices may stay below year ago levels, much higher soybean prices and hay prices with keep feed costs high and this could well dampen increased in milk production this winter. For the U.S., alfalfa hay prices for September were 21.6% higher than a year ago with California experiencing a 44.4% price increase. Later commercial disappearance reports will likely show that the high wholesale and retail prices of dairy products no doubt did slow sales. This combination of milk production and dairy product sales will lower milk prices, but yet prices will stay relatively high historically. Respectively, the September Class III and Class IV prices were $20.07 and $21.61. For October, Class III will be around $18.45 and Class IV still near $21.00. By December, Class III may fall to around $17.00 or even a little below, but Class IV may stay well above $19.00. For 2008, Class III will continue to fall during the first half of the year, but may stay above $15.00. Class IV could stay above $17 and will remain as the mover of Class I prices. For all of 2007, the Class III price will average around $17.60, breaking the previous record of $15.39 set in 2004. The average All Milk Price will be near $19.00, also breaking the previous record of $16.05 set in 2004.

Bob Cropp, Professor Emeritus
UW-Extension & UW-Madison