Expensive feed and cheap milk leads to fewer cows and less production

Milk production continues to slow as milk cow numbers decline and milk per cow remains well below normal increases. USDA estimates that U.S. milk cows for March were down 8,000 head from a year ago, and down 47,000 head or 0.5% since the end of last year. Cow slaughter for the first quarter of the year was 17.2% higher than a year ago. But in recent weeks cow slaughter has been running only about 5% higher than a year ago. Milk per cow for March was actually 0.2% lower than a year ago resulting in 0.3% less total milk production than a year ago. Low milk prices and relatively high feed costs are the key factors for declining cow numbers and holding down milk per cow and total milk production.

Compared to a year ago, a significant decline in U.S. milk production for March is contributed to California and Idaho with declines of 3.8% and 2.4% respectively. Milk production was down 140 million pounds for California and 24 million pounds for Idaho compared to the decline for the U.S. as a whole of just 42 million pounds as some other states had significant increases in milk production. California’s decline was contributed to 1.1% fewer cows and 2.8% less milk per cow while Idaho had 1.7% more cows but 4.0% less milk per cow.

Milk production was up in other Western states with New Mexico up 3.8% and Texas up 8.4%, but Arizona had a 2.5% decrease. In the Southeast, Florida had a 2.0% decrease. In the Northeast New York and Pennsylvania had decreases of 1.7% and 0.3% respectively, and increases of 3.7% and 0.7% respectively for Michigan and Ohio. Vermont had a 4.5% decrease and Virginia a 1.3% decrease. In the Midwest, with more cows and higher milk per cow, Wisconsin had a 1.9% increase in milk production and Minnesota a 2.0% increase. With 0.5% fewer cows and no increase in milk per cow, Iowa had a 0.5% decrease in milk production.

Despite milk production now running below a year ago, milk prices remain at depressed levels. The March Class III price was $10.44, up $1.33 from the $9.31 low in February. The April Class III will show slight improvement to about $10.75. The March Class IV price was $9.64, up slightly from the $9.45 for February and will improve to about $10.05 for April. The U.S. All Milk Price was $11.60 in February falling to $10.50 for March and will improve to about $11.80 for April.

Milk prices depend upon the strength of dairy product prices. CME butter prices where at a low of $1.09 per pound early February, but strengthened to $1.2025 as of April 18th. The CME cheddar barrel cheese price was at a low of $1.1775 per pound early January, and then strengthened to $1.37 on March 19th only to fall back to $1.11 as of April 18th, just one cent above support. The cheddar 40-pound block price was a low of $1.04 per pound early January and strengthened to $1.295 on March 20th only to fall back to $1.17 as of April 18th. Cheese buyers had filled their orders for the Easter holiday period and are now less aggressive in purchases. Recently nonfat dry milk has shown a slight improvement with some Western product selling as high as $0.83 per pound. Dry whey also has strengthen from the $0.15 to $0.17 per pound range to some trading as high as $0.24. This higher dry whey price could add more than $0.30 to the Class III price.

Softness in domestic sales and a significant drop in exports are key factors in depressing dairy product prices. Compared to year ago, February exports of nonfat dry milk/skim milk powder were down 66%, cheese exports down 22%, butterfat exports down 73%, lactose exports down 16% with only total whey protein exports up slightly to 7%. This loss of exports adds a significant amount of milk that needs to clear the domestic market and is a major factor for depressed dairy product prices. As a result, supplies of dairy products are more than adequate to meet domestic needs and exports. Compared to a year ago and adjusted for leap year, February butter production was up 2.6% and stocks down just 3.6%. American cheese production was up 3.6%, stocks up 12.5%, and total cheese production up 1.4% and stocks up 11.5%. Dry whey production was down 2.7% and stocks down 3.6%. Whey protein concentrate production was down 3.3% but stocks 4.0% higher.

As milk production continues to decline from year ago levels and lower wholesale and retail prices gives some boast to domestic sales, and perhaps some slight improvement in exports, especially nonfat dry milk/skim milk powder and whey products, dairy product prices should strengthen as we move into summer. Milk prices may not show any improvement for the month of May, but in the months following farm milk prices will continue to show improvement. By July we could see the Class III price at $13.00 or higher and by November and December $15.50 or higher. The Class IV price could be $11.15 or higher by July and by November and December $12.00 or higher. This would put the U.S. All Milk Price in the $16.50 to $17.00 range by November or December. However, this optimism is currently not expressed in either dairy futures or by the USDA. Class III futures have weakened the past 10 days. Class III futures settled on April 17th at $12.56 to $14.54 for July through September and a high of just $15.02 for December. While USDA forecasts milk production for 2009 to be down 1.5% from the 190 billion pounds produced last year, their forecast is for the Class III price to average for the year just $10.65 to $11.15 and the All Milk Price $11.85 to $12.35. Let’s hope prices turn out better than this because before most dairy producers can realize favorable returns over operating costs they need a Class III price of at least $16.00 to $17.00 and an All Milk Price at least $17.00 to $18.00.

Dairy Situation and Outlook, April 20, 2009
By Bob Cropp, Professor Emeritus