Dairy Situation and Outlook, November 20, 2008

Milk prices are trending much lower than a year ago due to lower cheese, dry whey and nonfat dry milk prices. The October Class III price was $17.06 and will decline in November to around $15.55, nearly $3.70 lower than a year ago. The Class IV price was $13.62 for October and will be around $13.50 for November, about $6.90 lower than a year ago. Milk prices are not forecast to improve and could go even lower as we finish the year and for the first half of 2009. For 2009 Class III futures are below $15.00 through May and Class IV futures are at or below $13.00 through May.

CME butter prices, which were $1.75 per pound mid-October, are now $1.62 per pound and are expected to decline shortly as Christmas orders are filled. CME 40-pound cheddar blocks, which were as low as $1.605 per pound the beginning of November, have improved to $1.76 per pound. CME cheddar barrels were $1.685 per pound the beginning of November and have improved to $1.73 per pound. Cheese prices are also expected to decline once holiday orders are filled. Dry whey, which was $0.44 per pound a year ago, is now in the $0.15 to $0.18 range. This is lower than the make allowance in the Class III federal order formula resulting in a negative other solids price per pound. In response to low prices the production of dry whey was down 5.1 percent in September from a year ago. This lower dry whey price from a year ago explains about $1.70 of the lower Class III price. Nonfat dry milk is in the range of $0.82 to $0.90 per pound. A year ago nonfat dry milk was $1.88 per pound. Since the second week of October the CCC has been purchasing weekly nonfat dry milk at the support price of $0.80 per pound. The lower dairy product prices cannot be blamed on surplus stocks. Stocks of dairy products are not burdensome. September 30 stocks compared to year ago show butter stocks 22.5 percent lower, American cheese stocks just 2.5 percent higher, total cheese stocks 2.4 percent higher and dry whey stocks 8.6 percent lower.

Lower milk prices are not being driven by a lot more milk being produced. USDA’s estimate for October showed milk production just 1.2 percent more than a year ago. Monthly increases in milk production have been below 2 percent since July and the October increase is the lowest this year. The relatively smaller increase in milk production is the result of below normal increases in milk per cow. October cow numbers were the same as September, but down 15,000 head from the July peak and were still 1.0 percent higher than a year ago. October milk per cow was just 0.3 percent higher than a year ago. High feed costs and reduced use of rBST are contributing factors to smaller increases in milk per cow.

A reduction of 1.6 percent in milk per cow more than offset 0.7 percent more milk cows in California netting 0.9 percent less milk production. More milk cows but no increase in milk per cow held Idaho to a 6.2 percent increase in milk production. Lower milk per cow held Arizona’s increase in milk production to just 0.3 percent. New Mexico had a 3.1 percent increase in milk production. Texas had the highest relative increase in milk production at 14.1 percent.

In the Northeast both New York and Pennsylvania had fewer milk cows and less milk per cow resulting in a reduction in milk production of 0.7 percent and 2.8 percent respectively. In the Upper Midwest both Wisconsin and Minnesota had more milk cows and more milk per cow resulting in 1.9 percent and 1.8 percent more milk production respectively. Iowa had no more cows but higher milk per cow resulted in 3.7 percent more milk production. In the Southeast, Florida’s milk production is recovering seasonally and a 7.1 percent increase in milk per cow more than offset 4.8 percent fewer cows netting 2.1 percent more milk. Other states with less milk production due to fewer cows was Illinois, -0.7 percent; and Virginia, -2.1 percent. Less milk production due to less milk per cow was observed in Indiana, -3.6 percent; and Kentucky, -3.1 percent. Milk production was down 1.9 percent in Vermont due to both fewer cows and less milk per cow.

While increases in milk production are not relatively high a slow down in domestic milk and dairy product sales and dairy exports are to blame for lower milk prices. Economic troubles in the U.S. economy is hurting domestic sales. A slow down in the world economy, the strength of the U.S. dollar and more product available has lowered world dairy product prices and reduced the interest in further dairy exports from the U.S. Tight credit polices to pay for imports in some importing countries is also hurting U.S. exports. Fluid (beverage) milk sales January through September compared to a year earlier were down 0.5 percent. American cheese sales are only about 1 percent higher and other cheese types, mainly Italian cheeses are almost 2 percent lower. The exception has been good butter sales. But, slower restaurant traffic is hurting cheese sales. Up until now dairy exports have been good. Compared to a year ago January through September exports were up 48 percent for cheese, 299 percent for butter and 77 percent for nonfat dry milk (skim milk powder) with dry whey exports down 17 percent. But since then exports have softened and this situation is anticipated to continue in 2009.

While corn and soybean prices have weakened they are still well above recent year prices. Hay prices are well above a year ago. Thus, milk production costs are higher and as of now dairy futures do not offer prices that allow dairy farmers to protect favorable margins. With a continued slow growth in milk production, the sixth round of CWT dairy herd reduction and continued CWT dairy export assistance along with some improvement in domestic sales, and perhaps exports by second half of 2009, milk prices could show considerable improvement for the second half of the year but still average well below prices experienced in 2008.

Bob Cropp, Professor Emeritus
University of Wisconsin Cooperative Extension
University of Wisconsin-Madison