Dairy Situation and Outlook, Oct. 20, 2008

U.S. estimated milk production continues to run above year ago levels, but since July at a rate of less than 2%. While milk cow numbers have been higher than a year ago, increases in milk per cow have been well below past increases. September milk production for the U.S. was estimated to be 1.7% higher than a year ago, the result of 1.1% more milk cows but only a 0.6% increase in milk per cow. Milk cow numbers, which were increasing month to month beginning with May of 2007 saw August numbers to fall from July and September numbers from August for a total decline of 15,000 head, or a 0.2% decline from July. High feed prices and lower milk prices and anticipated even lower milk prices this winter has negatively impacted milk per cow and increased dairy cow slaughter. From January through September dairy cattle slaughter was about 5% higher than a year ago. Milk production for the year will be about 2% higher than 2007.

California which experienced lower milk production than a year ago for July and August produced 0.8% more milk in September. But, cow numbers declined 2,000 head from August and milk per cow was 0.3% lower. Idaho had 6.3% more cows but 0.5% less milk per cow netted 5.8% more total milk production. Production was up 4.5% for New Mexico and Texas had the highest relative increase in milk production at 15.2%. New larger dairy herds are increasing cow numbers in Texas, up 10.6%; Colorado, up 8.3% and Kansas, up 5.5%. Milk production was up 5.7% in Colorado and 9.2% in Kansas.

New York experienced a 1.2% increase in milk production but fewer cows and less milk per cow reduced Pennsylvania milk production 1.8%. Both Wisconsin and Minnesota has 0.4% more milk cows and increases in total milk production of 1.0% and 1.5% respectively. Florida continues to see milk production decline, down 2.8% for September due to 4% fewer cows and only 1.3% more milk per cow.

Milk prices have fallen from their summer levels. While CME butter has been above $1.70 per pound since September 17th, dry whey prices, which were $0.26 per pound in May, have fallen below $0.20. On the CME, 40 pound cheddar blocks, after reaching a low of $1.68 per pound on September 2nd recovered to $1.9825 by September 22nd but as of October 17th, the price had fallen to $1.79. With these product price movements the September Class III price was $16.28, the first time below $17 since April and may recover to about $16.90 for October. A year ago, the September Class III price was $20.07 and for October $18.70. The nonfat dry milk price, which was around $1.46 per pound June and July, has declined to less than $1.00 per pound. On October 10th, 8.3 million pounds of nonfat dry milk were sold to the CCC at the $0.80 support level, the first such sale since July 2006. While butter prices are relatively high, lower nonfat dry milk prices have resulted in the Class IV price, which was $16.64 in August to drop to $15.45 in September with some further decline expected for October.

While milk production is now increasing less than 2% over last year, the weakening of farm milk prices is the result of softening of both domestic sales and exports of dairy products. Relatively high retail dairy food prices and gas prices along with the economic down turn is hurting beverage milk and dairy product sales. Retail prices in August for all food, as well as dairy products as a group, were more than 6% higher than a year ago. Compared to a year ago, commercial disappearance for the January through July period showed butter up 18.8%, but American cheese was up only 0.4%, other cheeses down 1.6% and beverage milk down 0.8%. A weakening of cheese sales is also evident by mozzarella cheese production. Mozzarella, unlike cheddar which can be stored and aged, needs to move through the market channel fairly quickly. Mozzarella production has been below year ago levels most of the year with August production down 2.8%. In contrast, since May cheddar cheese production has been higher than a year ago and was up 6.5% in August. Due to good butter sales August 31st butter stocks were 15.2% below a year ago while American cheese stocks were 3.8% higher.

January through August exports were well above year ago levels. Butter exports were about 500% higher, cheese 48% higher and nonfat dry milk (skim milk powder) up over 80%. But, with expected milk production recovery in New Zealand and Australia, some increase in milk production over a year ago in the EU, the strengthening of the dollar and a world economic down turn world dairy product prices are declining. As a result, interest in dairy exports from the U.S. is also slowing.

High feed prices and lower milk prices will reduce the size of the dairy herd in 2009 as well as increases in milk per cow. Milk production may increase by no more than 1% over that of 2008. But, a slower growth in domestic milk and dairy product sales as well as lower dairy exports during 2009 will result in lower milk prices for 2009. At this time both Class III and Class IV futures for all of 2009 are $2.00, $3.00 or more dollars below comparable monthly 2008 prices.

Robert Cropp, Professor Emeritus
UW Cooperative Extension and UW-Madison