Back at the beginning of the year, milk prices were forecast to be rather soft during the first half of the year with higher prices for the second half. Lower milk prices, coupled with high feed costs, would make returns over feed cost unfavorable and dairy producers would respond by feeding less grain and concentrate and reduce cow numbers, slowing the growth in milk production, which would result in improved milk prices for the second half of the year.

But, it looks like just the opposite will occur.

In January, the Class III price was just $13.48, Class IV $16.42, and the U.S. All-Milk price $16.50. By June, the Class III price increased to $19.11, Class IV to $21.05, and the U.S. All-Milk price to $21. These higher prices occurred despite dairy producers adding cows month to month starting back last December. The nation’s cow herd for the first half of the year averaged 0.8 percent higher than a year ago. However, milk per cow averaged just 0.9 percent higher, resulting in total milk production being 1.8 percent higher.

Butter and cheese sales have been favorable. But fluid (beverage) milk sales, which fell 1.4 percent last year, continue to be down more than 1 percent this year.

So, what caused these higher milk prices? The answer is strong dairy exports. Exports for the first four months of the year were up substantially from a year ago.

Where are milk prices headed for the last half of the year?

With feed prices expected to remain high and anticipated lower milk prices this fall and winter, we can expect cow numbers to decline some going into 2012. And, with expected lower returns over feed costs, increases in milk per cow will likely be less than 1 percent, keeping increases in total milk production well under 2 percent for the reminder of the year, which is positive for milk prices.

A key factor will be the level of exports for the remainder of the year. Overall, the world economy has done better than the U.S. economy. Demand for dairy products has been strong by all major international customers. World milk production for exports has been held in check mainly by weather-related issues in Australia and New Zealand. Both countries expect improvement in milk production, but that will only begin later this fall. While it appears the world market will now support a higher level of dairy product prices, some demand resistance to current prices appears to be occurring. So, while exports should remain rather favorable, they likely will not be as strong for the last half of the year.

The bottom-line is we are likely to see lower milk prices the last half of the year. Opinions vary considerably as to how much lower. There is a lot of uncertainty because we know milk prices are very sensitive to rather small changes in or anticipated changes in either or both supply and demand factors. Cheese prices have started to show weakness. Butter, nonfat dry milk and dry whey prices are likely to decline much slower than cheese prices.

We could see the Class III price fall below $19 by August and end the year near $17. Class IV may not fall below $19 until September, ending the year in the mid $17’s. The U.S. all-milk price may fall from about $21.30 in August to $19.30 in December. But the year as a whole is much improved over 2010, despite higher feed prices.

For the year, Class III could average about $17.80, compared to $14.41 last year; Class IV $19, compared to $15.09; and the U.S. all-milk price $20.10, compared to $16.55.

 Bob Cropp is professor-emeritus and dairy economist at the University of Wisconsin-Madison.