The growth in milk production continues to put downward pressure on milk prices.

U.S. milk production on a daily basis was 3.9 percent higher than a year ago for the January-through-April period. Milk cow numbers have been increasing since October of 2010 (please see the chart “More and more milk cows”). As of April, milk cow numbers had increased 49,000 head since the end of last year, resulting in 90,000 more milk cows than a year ago. Milk per cow, which increased just 0.9 percent in 2011, averaged 2.9 percent higher this year January through April.

Class III milk prices could average $16.20 this year

The growth in milk production has strained milk plant capacity in states like California and Wisconsin. Markets can only clear at lower milk prices. Fluid milk sales continue to decline. Fluid milk sales, which utilize about 30 percent of U.S. milk production, declined 1.2 percent in 2010, another 1.7 percent in 2011, and were 3.2 percent lower January through March of this year.

This means more of the increase in milk production will need to be used for manufactured dairy products. Compared to a year ago, January through March dairy production (daily adjusted) was up 48.8 percent for nonfat dry milk, 7.8 percent for butter, and 3.2 percent for cheese. Dairy exports have helped clear some of this production.

Compared to a year ago, January through March exports were up 5 percent for nonfat dry milk/skim milk powder, 7 percent for cheese, but down 34 percent for butter.

Nevertheless, all dairy product prices are considerably lower than a year ago, bringing down farm milk prices.

Milk prices set a new record last year, with the Class III price averaging $18.37 and the U.S. all-milk price $20.14. The Class III price reached $21.67 in August (please see the chart “Class III prices down considerably from last year”). The Class III price averaged $16.65 January through May of last year, compared to $15.96 during the same period this year.

Class III milk prices could average $16.20 this year

Milk prices will show some recovery for the remainder of the year. The June Class III price may reach $15.40 and peak around $16.75 October or November. If this holds, the Class III price will average about $16.35 for June through December. The average Class III price for the year would be around $16.20 and the average all-milk price near $17.70, compared to the averages of $18.37 and $20.14, respectively, last year.

But for milk prices to come close to this forecast, or to do even better, it will require continued growth in domestic milk and dairy product sales, good exports, and a slowdown in the growth in milk production closer to 2 percent.

For the second half of the year, cow numbers may not decline, but could stop increasing.

Current high feed costs and lower milk prices have greatly reduced returns over feed costs. This, along with very favorable slaughter cow prices, would lead one to one expect that the increase in cow numbers will stop. But perhaps the current proposed dairy policy for the 2012 Farm Bill that gives producers the option of receiving, at no cost, margin protection (returns over feed cost) of $4 on 80 percent of their highest annual milk production for the three years prior to implementation is encouraging some producers to maintain or even increase milk production.

Finally, how weather impacts milk per cow and crops this summer will be a key factor impacting feed cost, milk production, and milk prices this fall and next winter.

Bob Cropp is professor emeritus and dairy marketing specialist at the University of Wisconsin.