Milk production is picking up, as dairy producers add cows and feed for higher production per cow.
USDA’s Milk Production report estimated July’s production 3.9% higher compared to a year earlier, and revised June’s preliminary estimate, with June 2014 production now 2.2% higher than a year ago.
Through reduced culling and adding dairy replacements, July milk cows numbered 0.4% higher than a year ago. Dairy cow slaughter this year is 10.3% lower than a year ago.
The combination of strong milk prices and much lower feed costs has meant very favorable margins for dairy producers to increase milk production.
Corn prices are 44% lower than a year ago, and soybean meal prices are starting to decline, now 5% lower than a year ago.
Alfalfa hay prices are just 3.3% higher than a year ago. However, California, with a severe drought, is experiencing alfalfa hay prices 35% higher than a year ago.
Based on July estimates for the 23 reporting states, 11 had more cows than a year ago; 21 had more milk per cow; and 20 had more total milk production.
In the West, July milk production was well above a year ago, except in New Mexico. Milk production was up 8.9% in Arizona; 4.4% in California; 4.0% in Idaho; and 5.5% in Texas. Milk per cow was higher for each of these states, but cow numbers were down slightly in California and New Mexico.
The Northeast showed strong increases in milk production, up 8.2% in Michigan; 4.8% in New York; 3.4% in Ohio; and 3.0% in Pennsylvania. Each of these states had more milk per cow, but Pennsylvania and Ohio had fewer cows.
In the Upper Midwest, the increase in milk production was not as strong. Milk production was slightly lower in Minnesota; 1.6% higher in Iowa; and 3.4% higher in Wisconsin. Each of these states had higher milk production per cow, but each had fewer milk cows.
August prices strong
Despite milk production picking up, butter and cheese prices will average higher in August. On the CME, butter averaged $2.46/lb. in July, but has been higher in August, reaching $2.66/lb. on Aug. 15. Cheddar barrels averaged $1.997/lb. in July, and increased to $2.21/lb. on Aug. 15. The 40-lb. cheddar block price averaged $1.987/lb. in July, increasing to $2.22/lb. on Aug. 15.
Except for July, cheddar block have averaged above $2/lb. every month this year; cheddar barrels averaged above $2/lb. in the first quarter of the year, and near $2/lb. since then. Higher cheese and butter prices, along with dry whey holding at 67¢/lb., will result in an August Class III price near $22.20/cwt., compared to $21.60/cwt. in July.
While butter prices have increased, nonfat dry milk prices have weakened. Nonfat dry milk averaged above $2/lb. through May, but is now at $1.70/lb. But, the higher butter price will hold the August Class IV price near $23.25/cwt., compared to $23.78/cwt. in July.
With higher milk production and anticipation of some softening in dairy exports, the higher butter and cheese prices were a little surprising. Butter exports, which were running well above a year ago, were 21% lower in June than a year ago, but still 57% higher year-to-date. Cheese exports, however, were still 33% high than a year ago, and 34% higher year-to-date.
Domestic butter and cheese sales have been running above a year ago.
Production and stocks
June butter production was slightly below a year ago, while American cheese production was up 3.2%, and total cheese production 3.3% higher.
But, the higher butter and cheese prices have been driven by stock levels lower than what butter and cheese makers, as well as some buyers, would like to meet the strong holiday sales period later this year. They also realize that increasing butter and cheese production is more limited, with milk production and milk composition seasonally lower during the summer. Schools will also be opening the end of this month and early September, moving more milk into beverage use.
Butter stocks (based on June 30 estimates) were 42% lower than a year ago. American cheese stocks were 7% lower, and total cheese stocks were 8% lower. With good domestic sales and strong exports, the need for higher stock level exists. Compared to the previous five-year average, June butter stocks were actually 32% higher and total cheese stocks 3% higher.
Exports, global prices
Dairy exports have been a big factor for higher U.S. dairy product and milk prices. World dairy product prices had been higher than U.S. prices, giving U.S. a competitive edge in exports. But, world milk production has improved significantly, particularly in the major exporters of New Zealand and the European Union.
China has been very active in importing dairy products, moving past Canada as U.S. second-largest customer. But China has accumulated stocks to the point where their import activity has decreased. The result has been a significant fall in world prices, below U.S. prices.
While cheese exports were still higher than a year ago for June reports are that new orders by international buyers have softened. As noted June butter exports have already fallen below a year ago as have nonfat dry milk exports down 25%. To maintain export levels, U.S. prices will need to come down closer to world prices. Yet, export volume will likely hold at levels that will end the year above the record level of 2013.
Milk production for January through July was 1.6% higher than a year ago. With milk production flat the last quarter of last year, we can expect milk production to continue to run 4% or more higher than year-ago levels for the remainder of the year, ending 2014 around 2.4% higher than 2013.
We can expect dairy product prices and milk prices to decline. The question is how soon, and by how much. It will take time to build stock levels, so prices could gradually decline rather than take a sharp fall.
Dairy futures remain very optimistic, with the Class III price staying above $21/cwt. through October; above $19/cwt. for December; and above $18/cwt. for all of 2015.
The Class IV price stays above $20/cwt. through October, but then declines more quickly, to less than $18/cwt. by December; staying in the $17s/cwt. for 2015.
But, the odds are that prices could average lower – rather than higher – than these future prices later this year and into 2015. Nevertheless, milk prices will set new records in 2014, with the Class III price averaging well over $21/cwt. compared to $17.99/cwt. last year, and the Class IV price over $22/cwt., compared to $19.05/cwt. last year.
University of Wisconsin-Madison