For several years I have been forecasting milk prices in a monthly report. Sometimes, I come quite close to the final milk price and at other times, well, things turn out differently.

However, the goal of analyzing market information should not be to project prices to the exact penny for a specific month. Rather, reviewing monthly historical milk prices, seeing where futures prices are headed, and determining the probability for prices to increase or decrease can be extremely valuable to dairy producers interested in protecting their price on future milk production.

In today's market, relatively small changes in actual or anticipated market forces can result in rather significant changes in both cash prices and futures prices. While we cannot be certain as to a specific milk price for a distant month, having a sense of where milk prices may be headed is very useful in implementing price risk management strategies.
What market indicators should dairy producers watch to forecast milk prices and the probabilities for stronger or weaker prices? The key is to be knowledgeable of the historical market data and historical trends. Deviations from history are a sure sign that milk prices will respond.

The list of market data you need to monitor need not be long. I would suggest that dairy producers watch the following factors each month:

  • Milk cow numbers. Watch for above-average swings in the size of the U.S. cow population. In the past 10 years, milk cow numbers have declined about 0.6 percent annually.

    To show how changes from this annual rate can impact the market, consider that cow numbers in 1998 declined by 1.1 percent, spurring milk prices to record-high levels.

    But in 1999, the decline in milk cow numbers stopped as strong milk prices stimulated dairy expansion and growth. The result was a sharp decline in milk prices the last quarter of 1999, and prices stayed depressed until March 2000.

    In early 2001, milk cow numbers have been declining, causing futures prices on the Chicago Mercantile Exchange to gain strength.

  • Milk per cow. Cow numbers make up one part of the milk production equation. The amount of milk produced per cow also is needed to determine the overall output.

    For the past 10 years, the average annual increase in milk per cow has been 2.1 percent. A record hot summer during 1998 slowed this increase to 1.9 percent, again factoring into the high prices seen during the last part of that year. But, production recovered and increased by 3.4 percent in 1999 and was followed by a 2.4 percent increase in 2000.

    However, in early 2001, milk per cow has been stagnant, causing price forecasts and CME futures prices to rise.

    • Total milk production. With the nation's consumption of dairy products increasing at a rate of around 2.2 percent each year, total milk production must also rise at that level.

      Again, record high milk prices resulted in 1998 when milk production increased by just 0.8 percent for the year. But, as production rebounded in 1999 - increasing by 3.4 percent when compared to previous-year levels - prices declined. Prices stayed depressed throughout 2000, and are now showing real strength as milk production fell below previous-year levels in December of 2000 and in January, February, March and April of 2001.

      You can track milk production in the U.S. each month - as well as cow numbers and milk per cow - by viewing the USDA's 20-state milk production report, released around the 15th of the month. You can find the report at: http://usda.mannlib.
      cornell.edu/reports/nassr/dairy/pmp-bb/2001/

    • Milk-feed-price ratio. The milk-feed-price ratio estimates the profitability of milk cows based on the current milk price and the cost of feed inputs. The feed cost is based on a typical dairy ration, using commodity prices for corn, soybeans and alfalfa.

      In the last five years, the milk-feed-price ratio has averaged 3.25. A ratio of 3.0 or more indicates a favorable relationship between milk prices and feed. In other words, it's profitable to supply cows with feed and sell milk.

      Recently, depressed corn and soybean prices have allowed for a favorable ratio - even when milk prices have declined. As a result, producers' response to market signals has been slow.

      USDA releases the milk-feed-price ratio around the 30th of every month in the Agricultural Prices Report. You can find this report at: http://usda.mannlib.
      cornell.edu/reports/nassr/price/pap-bb/2001

    • Feed supply and quality. As the milk-feed-price ratio indicates, cheap feed results in higher milk production. Therefore, when analyzing information to gauge market movements, keep an eye on the feed supply and its quality.

      Of particular interest is the quantity of high-quality forages, such as corn silage and alfalfa hay, as these can have a significant impact on milk per cow and total milk production.

      For example, the wet spring and summer experienced in 2000 in parts of the Northeast reduced forage quality, which has shown up in lower milk production per cow this past winter in that region.

    • Weather. The saying that milk price depends upon the weather is not far from the truth. Weather impacts milk per cow and feed quantity and quality. These factors can be of special importance in key dairy states, such as California, Wisconsin and New York.

      Not only can inclement conditions decrease milk output, they also can delay breeding, throwing off a cow's lactation period.

      • Commercial disappearance of milk and dairy products. Commercial disappearance - including the domestic consumption of dairy products as well as exports and sales to the government - has been strong for the past several years, increasing between 2 percent to 3 percent per year. This has not been the major source of milk-price fluctuation, rather it has resulted from changing milk production.

        Cheese consumption has been the driver behind increased dairy product consumption. In turn, people's disposable incomes and the cultural trend of people eating out more often has spurred cheese consumption. Therefore, in addition to watching the disappearance of milk and milk products, producers should watch measures of the U.S. economy. Demand may slow down if the economy does.

        The USDA's Economic Research Service reports the commercial disappearance of milk and milk products every month in a report entitled, "Livestock, Dairy and Poultry Outlook" around the 25th of the month. You can locate it at: www.ers.usda.gov/
        publications/so/view.asp?f=livestock/ldp-mbb/

      • Dairy product stocks. The term "dairy product stocks" refers to the storage of dairy products. If milk production increases faster than commercial disappearance, the stocking of warehouses with dairy products also increases. This places downward pressure on dairy product prices and farm-level milk prices.

        It is important to note that stocks change seasonally. Historically, inventories increase during the late-winter and early-summer months, but decline during the fall. Therefore, compare movement in stock levels with the historical average for the month.

        Note the chart on page 60 on total cheese stocks for the past few years. Cheese stocks were high during 1999 and 2000 and have just started to decline in 2001. This change in cheese stocks, along with milk production data, supports stronger milk prices for the months ahead. However, don't just focus on cheese - stocks of butter and nonfat dry milk are important to watch, also.

        You can follow the stock of dairy products by reviewing the USDA's Cold Storage report, which is released each month around the 20th. To review, use the following link: http://usda.mannlib.
        cornell.edu/reports/nassr/other/pcs-bb/2001/

      • Seasonality. Both milk production and the commercial sales of dairy products vary seasonally, making it an important factor to consider.

        Milk production normally increases from January to about May - often called the spring flush - and then declines during the warm summer months. Then, milk production again starts increasing during the fall.

        Commercial sales of dairy products show a different pattern. Typically, sales decline during the first four or five months of the year, but then begin to increase, peaking around September and then falling off again. This may seem counter-intuitive as we know consumers eat a lot of cheese and butter during the Thanksgiving and Christmas season. However, in order to meet this strong demand, wholesalers must build their inventories prior to the holiday period.

        This difference in production peaks and sales peaks makes July through September a critical period. For example, if milk production has not been overly strong and could continue to show slow growth, wholesalers of butter and cheese will likely bid up dairy product prices in July and August, strengthening producer prices. Conversely, if milk production is strong, the seasonal rise in dairy product prices and milk prices will be less.

        New market information can quickly change actions on the part of wholesalers. For example, during the late spring and summer of 1999, drought-like conditions were developing in the Northeast, which caused concern about the possibility of tightening supplies of butter and cheese in the fall. The result: wholesale cheese and butter prices increased rather sharply, resulting in a record-high September milk price. But as new market data was available showing a continuation of strong milk production, these wholesale prices dropped sharply, bringing down farm milk prices.

        So, producers need to realize that milk prices are seasonal, and the degree of the seasonality depends upon both the current and anticipated milk production. The best tool to monitor the value of dairy products is to watch the closing prices of cheese and butter at the CME. Visit the Web site: www.cme.com/dairy for those prices.

      These are not the only factors that influence prices. Others include retail prices, the price of substitutes and complementary food products, cull cow prices, culling rates, the use of BST, and others. But, concentrating on the major factors listed above will go a long way toward helping you decide the probability that future milk prices will increase or decrease.

      Taking 15 to 20 minutes each week to review market data can help you stay on top of what is happening in the market. Doing your own price forecasting will enhance your knowledge of the factors that influence milk prices. It will help make you a better business operator and enable
      you to develop and implement a better marketing plan to manage price risk.

      And, believe it or not, it can be fun.

      Bob Cropp is a dairy marketing and policy specialist at the University of Wisconsin in Madison, Wis.

      Help on the web

      Use the following web sites for commentary on dairy market conditions.

      www.aae.wisc.edu/future
      Maintained by staff at the University of Wisconsin, it contains current market data on both numerical and graphical form, and dairy policy issues.

      www.ams.usad.gov/marketnews.htm
      This site includes the weekly publication, "Dairy Market News." The publication includes dairy product production, price and stock data, milk production, international activity and prices, federal order data and dairy policy changes.

      www.aers.pus.edu/dairyoutlook/
      This site contains analysis by Ken Bailey, dairy economist at Penn State University.

      http://cpdmp.cornell.edu/
      This site, maintained by economists at Cornell University, contains price forecasts from various experts.