Dairy situation and outlook: As milk prices drop, cow numbers begin to decline

Driven by lower domestic milk and dairy product prices and lower dairy exports, farm milk prices have dropped sharply, according to the Feb. 19 Dairy Situation and Outlook Report by Robert Cropp of the Department of Agricultural and Applied Economics. In the face of these low numbers, farmers are milking fewer cows (California’s cow numbers are down for the first time since 1987) and feeding them less, so milk production should slow and milk prices should improve somewhat by the second half of the year, Cropp says. His full report follows:

Dairy Situation and Outlook, February 19, 2009

The drop in cheese prices the end of December and early January pushed farm milk prices much lower. On the CME 40-pound cheddar blocks dropped to a low of $1.04 per pound early January and cheddar barrels to $1.03 per pound, both below the CCC support price. As a result, the Class III price was just $10.78 in January and the U.S. All Milk Price $13.80. Cheese prices have recovered some. Cheese buyers have become more active on the CME. Buyers may be taking advantage of these low cheese prices and making purchases to build inventory for later use. As of February 19th, 40-pound blocks had improved to $1.325 per pound and barrels to $1.275 per pound. Yet with lower cheese prices earlier the February Class III price will fall to around $9.30 and the U.S. All Milk Price below $11.00. The last time prices were this low was early 2003, but milk production costs were lower then than now. Those dairy producers who signed up to start MILC payments in February will receive a payment around $1.45 to $1.55 per hundredweight depending upon final feed costs for February. But even with MILC payments dairy producers will be under considerable financial stress.

These depressed prices are driven more by lower domestic milk and dairy product sales and lower dairy exports than by much higher milk production. While milk production increased 1.9% in 2008 adjusted for leap year, production was up less than 1.4% for the last quarter. January 2009 production was estimated to be just 0.8% higher than a year ago. Normally when milk production is increasing well under 2% milk prices are quite favorable. But, economic problems domestically and internationally are hurting sales and exports of milk and dairy products. Until sales improve and/or milk production slows dairy product prices and milk prices will not improve. However, we can expect much lower milk prices to slow milk production and to improve domestic sales resulting in improved farm milk prices the second half of the year. Retail dairy product prices will decline slowly and we can expect some retailers to offer specials on some dairy products which should help sales. However, dairy products through restaurants will likely not be as strong. The December Restaurant Traffic Index was the lowest on record and below 100 for the past 16 months. Dairy exports which accounted for 10.8% of U.S. milk production on a total solids basis last year are projected to be 25% to as much as 40% lower in 2009. This means additional milk needs to clear the U.S. market.

Stocks of dairy products are building. While not burdensome, stocks are more than ample to meet market needs. Compared to a year ago, December butter and cheese production was fairly strong. Butter production was 10.1% higher and cheddar cheese production 6.7% higher. Reflecting slower restaurant sales, mozzarella production was 3.7% lower netting total cheese production just 1.1% higher. December 31st stocks of butter were still 23.4% lower, but American cheese stocks were 6.5% higher. Even though butter stocks are lower relatively strong production will build stocks, and as a result, CME butter is just $1.1025 per pound and the CCC is purchasing weekly butter from the West at $1.05 per pound under the support program.

Milk production may increase well under1% in 2009. USDA is projecting no increase. Cow numbers will decline and unfavorable returns over feed costs will continue to dampen increases in milk per cow. USDA’s report on January milk production already reveals these trends. Compared to a year ago, the estimated 0.8% increases in January U.S. milk production was the result of 0.5% more cows and only 0.3% more milk per cow. January cow numbers had declined by 14,000 head from December. Milk production was1.5% lower in California due to 0.4% fewer cows and 1.1% less milk per cow. This was the second consecutive decline in California’s milk production but the first decline in cow numbers since 1987. Idaho had 2.7% less milk per cow but more cows netted 0.9% more milk. New Mexico had 0.6% fewer cows but more milk per cow netted 5.5% more milk. Texas had both more cows and milk per cow resulting in 13.0% more milk. Arizona had 2.0% less milk per cow and 2% more cows resulting in no increase in milk production. Slight increases in both cow numbers and milk per cow resulted in 1.0% more milk in Wisconsin and 2.4% more milk in Minnesota. Iowa had 0.5% fewer cows but 1.2% more milk per cow netting 0.8% more milk. Both New York and Pennsylvania had fewer cows with milk per cow up slightly in New York netting 0.3% more milk and no increase in milk per cow in Pennsylvania netting 0.3% less milk. Cow numbers were 1.7% lower in Florida but more milk per cow netted 2.7% more milk. In summary, of the 23 reporting states 12 had fewer milk cows than a year ago, 9 had less milk per cow and 8 had less total milk production

With cow numbers starting to decline and milk per cow well below trend farm milk prices ought to improve as we progress through the year. By 2nd quarter Class III prices may improve to $10.85 to $11.90 and the U.S. All Milk Price to $11.85 to $11.90. By 3rd quarter Class III may be $12.45 to $13.60 and the All Milk Price $15.25 to $15.75. And by the 4th quarter Class III $14.25 to $14.75 and the All Milk Price $15.25 to $15.75. However, USDA’s latest price projections are not quite this optimistic. Whether prices end up lower or higher than this is not certain, but prices will improve the second half of the year. History clearly tells us that milk prices are very sensitive to rather small changes in milk production and/or sales. Other activities may also occur to help price recovery such as the CWT dairy export program, another and perhaps larger CWT herd reduction program, and USDA purchases of dairy products for domestic and international feeding programs. So let’s hope that prices by the second half of the year end up better than what are now projected

Robert Cropp
University of Wisconsin-Madison.