Dairy Situation and Outlook, February 18, 2008

Farm level milk prices have declined but remain relatively high. The February Class III price will be near $17.20, down more than $2 from the $19.32 for January but still more than $3.00 higher than a year ago. The Class IV price for February will be near $15.40, down about $0.90 from the $16.29 for January but still about $2.70 higher than a year ago.

We can expect the Class III to fall below $17.00 for March but it could stay above $16.00 through at least October. Currently, Class III futures are all in the high $16.00s. Class IV is also likely to decline further dropping below $15.00 by spring and then recovering once again to well over $15.00 by the second half of the year. As of now, it appears that the advanced Class III price rather than the advanced Class IV price will be the mover of Class I prices most, if not all of 2008.

Unexpected high cheddar cheese prices have held up the Class III price. At the beginning of February CME cheddar barrels were $1.72 per pound and 40-pound cheddar blocks $1.80 per pound. But, surprisingly as of February 15th barrels increased to $1.99 and 40-pound blocks to $2.05. Several reasons may explain this strength in cheese prices. The closing of cheddar cheese plants, in particular a relatively large cheddar plant in California resulted in less cheddar cheese production. As late as December 2007, cheddar cheese production was down 3.7% from a year ago with production for the entire year down 2.3%. Second, exports of cheddar cheese showed strong increase the second half of 2007. For all of 2007, cheese exports were up 40% from 2006 with the largest increase being cheddar exports, up 210%. Third, domestic demand for cheddar has held up fairly well despite high prices. So the inventory of fresh, not aged cheddar is fairly tight. December 31, 2007 stocks of American cheese was 2.82% lower than a year ago and stocks of all cheese 2.76% lower. But, nevertheless, milk production continues to increase, and with relatively strong cheddar prices, some cheese plants may start to allocate more milk from mozzarella production to cheddar production. Thus, we can expect cheddar prices to decline in the weeks ahead.

More of the increase in milk production is going into the production of nonfat dry milk and skim milk powder, especially in California. A new California milk powder plant capable of using 5 million pounds of milk a day is to come on line within the next month or so. Exports of nonfat dry milk (skim milk powder) have been lower. For all of 2007, exports were 10% lower than 2006. While not burdensome, stocks of nonfat dry milk are building with December 31st stocks 84.1% higher than a year ago. Nonfat dry milk prices have weakened considerably. Central states nonfat dry milk is in the $1.40 to $1.43 per pound range with West prices in the $1.20 to $1.35 range. Export interest is likely to improve later this year and prices in the $1.40 to $1.50 range may return by summer.

Like nonfat dry milk prices dry whey prices have also weakened. Weaker export interest, increased production and building of stocks are to blame. December 31st stocks of dry whey for human use were 16.1% higher than a year ago. Central dry whey prices are $0.24 to $0.2650 per pound with West prices $0.21 to $0.2850 per pound. Increased export interest may increase dry whey prices to near $0.40 per pound this summer.

Butter production continues well above year ago levels and so do stocks. December 2007 butter production was 2.6% higher than a year ago with December 31st stocks up 43.3%. CME butter prices are $1.2025 per pound and increases are not expected until early summer. By fall butter prices may reach $1.40 per pound and even higher.

As previously mentioned the continuation of relatively strong milk production will put downward pressure on dairy product prices and in turn farm level milk prices. For the 23 reporting states, January milk production was 2.4% higher than a year ago. Milk production has been increasing well over 2% since July of last year. Milk cow numbers have been building since May of last year. For the 23 states, January milk cow numbers were 120,000 head or 1.4% more than a year ago. An increase in milk per cow of just 1.0% held the increase in total milk production to less than 3%. The five top states that produce over half of the milk had the following increases: California 3.6%, Wisconsin 1.0%, New York 2.2%, Idaho 7.3% with no increase for Pennsylvania. Other states with strong increases were: Colorado 9.0%, Texas 6.3%, New Mexico 6.0%, Arizona 5.4%, Washington 4.8%, and Arizona 5.4%. Just 5 states reported less milk production: Missouri 10.0%, Oregon 8.3%, Florida 5.8%, Kentucky 5.3% and Illinois 1.8%.

Milk cow numbers are expected to continue to increase for at least until the last quarter of the year. While cow slaughter for January was running about 4% higher than a year ago, the number of dairy replacements is more than enough to expand the dairy herd. The January 1st cattle inventory showed the number of dairy replacements expected to calve during the year totaled 2.93 million head, up 3% from January 1, 2007. But, high feed prices and lower milk prices will lower returns over feed costs to dairy producers. This will slow the growth in the dairy herd by the last quarter of the year and hold down increases in milk per cow.

A slower growing economy is also likely to have some negative impact on milk and dairy product sales in 2008. For cheese and butter restaurant business is particularly important. Restaurant traffic, measured by an index, continued to soften in December 2007, the fourth consecutive monthly decline and the lowest index since February 2003.

Bob Cropp
University of Wisconsin-Madison