According to the USDA's Livestock, Dairy and Poultry report, exceptionally hot and dry weather throughout most of the United States, but especially the Midwest, has reduced expected U.S. corn yields to an average 123.4 bushels per acre for 2012/13. By contrast, U.S. corn yield in 2010/11 was 152.8 bushels per acre.

Corn production for the upcoming 2012/13 season is now forecast at 10,780 million bushels, compared with the 12,358 million bushels from 2011/12. Corn prices on the cash market have soared and the season average price for 2012/13 is now projected at $7.50 to $8.90 per bushel, a substantial increase from July’s forecast $5.40 to $6.40 per bushel.

Recent rains could rescue the soybean crop, but, soybean production is forecast to be 2,692 million bushels for 2012/13. Lower yields and lower-than-expected harvested acreage account for the decline.

Soybean meal production for 2012/13 is forecast at 36.0 million tons, a decline from July’s forecast and a year-over-year decline as well.

Soybean meal prices for the upcoming season are projected at $460 to $490 a ton. According to the July Agricultural Prices report, alfalfa hay prices have been steady at about $200 per ton for the last two months and up five percent from July 2011. The forecast production shortfall in feedstuffs is expected to raise feed prices for dairy producers in both 2012 and into 2013.

According to USDA/AMS, weekly estimated dairy cow slaughter turned substantially upward in July. Higher apparent culling, combined with higher feed prices, has led to a reduced 2012 herd size estimate of 9,215 thousand head in August.

While herd size is expected to be slightly higher on a year-over-year basis compared to 2011, the U.S. dairy herd is forecast to contract to 9,110 thousand head in 2013. The severe drought will impact milk production per cow both this year and next. In light of higher feed prices, USDA has lowered milk yield per cow to 21,705 pounds this year and 21,830 pounds in 2013.

Consequently, the milk production forecast for 2012 was lowered from July by 1.6 billion pounds to 200.0 billion pounds this year and to 198.9 billion pounds in 2013, a year-over-year decline in production.

Projected milk equivalent imports for 2012 on a fats basis were raised in August to 3.7 billion pounds and to 5.5 billion pounds on a skim-solids basis. Strong imports of butterfat, milk proteins, and casein during April, May and June supported the higher forecast.

For 2013, forecast imports were also raised to 3.6 billion pounds on a fats basis as butterfat imports are expected to remain high. Imports on a skimsolids basis were unchanged at 4.7 billion pounds as the pace of skim-solids imports is not expected to carry into 2013.

Exports on a fats basis for this year were increased to 9.8 billion pounds on a fats basis and to 33.4 billion pounds on a skim-solids basis based on a strong first half of the year performance. The export pace is likely to slow in the second half of 2012 due to higher prices.

Exports in 2013 were lowered from July’s projection to 8.9 billion pounds on a fats basis and to 32.5 billion pounds on a skim-solids basis as reduced supplies and higher prices are expected to impact all dairy exports.

Milk equivalent stocks on both a fats and skim solids basis were tightened for both 2012 and 2013. Lower expected milk production, especially in 2013, will contribute to the tighter stocks position. Prices across the board are expected to be higher for the rest of 2012 and in 2013 than previously forecast.

Product prices will be higher in 2013 than in 2012, but will still be below 2011 prices. The cheese price is forecast at $1.635 - $1.655 per pound this year rising to $1.640 - $1.740 per pound in 2013. The forecast butter price was also raised from July to $1.535 - $1.575 per pound in 2012 and to $1.515 - $1.645 per pound in 2013.

The nonfat dry milk price forecast was increased in August to $1.250 - $1.270 per pound for the current year and to $1.350 - $1.420 per pound in 2013. Whey prices were also raised to 55.0 - 57.0 cents per pound and 57.0 - 60.0 cents per pound for 2012 and 2013, respectively.

The higher forecast product prices are reflected in the class milk prices and in the all milk price. The Class III price is forecast at $16.50 - $16.70 per cwt this year and at $16.70 - $17.70 per cwt in 2013.

The Class IV price was increased in August to $15.10 - $15.40 per cwt in 2012 and to $15.90 - $17.00 per cwt in 2013. The all milk price is projected at $17.55 - 17.75 per cwt and $17.80 - $18.80 per cwt for 2012 and 2013, respectively.