Farm level milk prices continue at lower levels than were forecasted earlier in the year. The Class III price was $14.50 in January but just $12.78 for March. With what has been going on with cheddar cheese prices the April Class III will be near $12.80. On the CME 40-pound cheddar cheese averaged $1.2976 per pound for March and cheddar barrels averaged $1.2782 per pounds. During April 40-pound cheddar blocks were $1.43 per pound on April 1st, rallied to $1.51 on April 8th, but by April 19th the price had fallen $1.385. Barrel prices behaved similar with April 1st at $1.375 per pound, April 7th at $1.455 and April 19th at $1.35.This price behavior is not easily explained by market fundamentals. Compared to a year ago, February cheddar cheese production was only 0.6% higher than a year ago with the production of all cheese 1.0% higher. Information on cheddar cheese sales is mixed. It appears that cheese sales for pizza type of use have strengthened in that mozzarella production was up 5.4%. In addition, for the first two months of this year cheese had a trade surplus. Cheese exports totaled 42.7 million pounds, 17% higher than a year ago and the equivalent of 2.6% of cheese production. Cheese imports were 38.4 million pounds, down 35% from a year ago. But, cheese stocks remain relatively high and appear to be a major factor for lower prices. At the end of February, American cheese stocks were still 10.2% higher than a year ago.

Dry whey prices have held and give support to the Class III price. Dry whey prices in the West are $0.38 to $0.42 per pound. Prices are partially supported by exports. Compared to February a year ago, exports of dry whey was up14%, whey protein concentrates up 57%, whey protein isolates up 9% for a 30% increase for all whey proteins combined. For the first two months of the year total whey protein exports were up 44% and the equivalent of 64% of production.

As of April 19th, the CME butter price was $1.57 per pound, the highest price since November 2008. Butter demand has been good and both butter production and stocks are lower than a year ago. End of February stocks were 3.3% lower than a year ago. For the first two months of the year, butter exports were 40% higher than a year ago

Nonfat dry milk prices have shown some strength. Prices for the West range $1.125 to $1.22 per pound. While nonfat dry milk/skim milk powder exports dropped well below year ago levels in January, February exports were up 22% netting a decline in exports of 18% for the first two months of the year and the equivalent of 22% of production.

After increasing 1.1% during 2009, fluid milk sales were 0.1% lower than a year ago in February and up just 0.1% for the first two months of the year. Fluid sales account for about one third of total milk use.

Domestic sales of milk and dairy products will continued to be hampered by the sluggish economy. But, dairy exports are anticipated to continue to show growth over ago levels. There is economic recovery in some major importing countries. It now looks like milk production for the year will be down at least 4% in Australia and even at best in New Zealand, two major world exporters. Milk production is not expected to increase much over all for EU-countries. The net is world demand for dairy products should improve and the supply of dairy products on the world market tighter giving opportunity for U.S. to increase exports.

Nevertheless, the strengthening of farm milk prices hinges on what happens to milk production for the remainder of the year. Milk production fell 0.4% in 2009, the net result of the average number of milk cows down 1.2% and milk per cow up just 0.9%. Earlier forecasts were for a continued decline in the number of milk cows that more than offset increases in milk per cow and netting another decline in milk production for 2010. But, milk cow numbers for the U.S. increased 4,000 head for both January and February with no additional increase for March. Increases in milk per cow have improved but with fewer milk cows than a year ago total milk production was down slightly, decreases of 0.8% and 0.1% in January and February respectively. While March cow numbers are still 2.1% fewer than a year ago milk per cow increased 2.7% netting a 0.6% increase in total milk production for March. It now looks like milk production could actually increase in 2010. USDA is now projecting a 0.3% increase. If milk production does in fact increase, milk prices will not recovery to the extent earlier forecasted. But, a lot can happen between now and year's end that can impact milk prices.

The depressed milk prices experienced during 2009, and now the slow recovery in prices appears to continue impact milk production the greatest in the West and South/southeast. Compared to a year ago, March milk production was down 7.0% for Arizona, 0.7% for California, 3.8% for New Mexico and 2.6% for Texas. Each of these states experienced significant declines in cow numbers with cow numbers down 10.1% for Arizona, 4.7% for Texas and 3.5% for California. However, Idaho had 0.7% more cows resulting in a 0.3% increase in total milk production. Cow numbers were also higher in Washington, up 4.2% with total milk production up 6.8%. But, in the South/Southeast milk production was down 6.8% in Florida and 8.4% in Missouri.

In the Northeast, New York and Pennsylvania both had fewer cows but increases in milk per cow netted increases in milk production of 0.2% and 1.6% respectively. Michigan had 0.3% more cows and an increase in total milk production of 4.5%. In the Upper Midwest, Cow numbers were up 0.4% for Minnesota and 0.3% for Wisconsin but down 2.3% for Iowa. Relatively strong increases in milk per cow resulted in total milk production up 3.8% in Minnesota. 6.3% in Wisconsin and 0.3% in Iowa.

Milk prices will improve as the year progress. Milk production will decline during the summer months and the demand for milk, cheese and butter will increase fall and early winter. Dairy exports should increase as well. But, what is needed for much improved milk prices is a slow down in milk production. As of now Class III dairy futures reach $14.35 for July, peak at $15.10 for September and end in December at $14.68. While these prices are an improvement over 2009, higher prices are needed for dairy producers to recover from lost equity. There still is a good probability that prices could do better than this, especially for the second half of the year.

Source: Robert Cropp, University of Wisconsin-Madison