Bob Cropp, professor emeritus at the University of Wisconsin-Madison, offers the following comments on the current dairy situation and outlook.

“USDA's preliminary end of the year estimates for 2010 shows milk production at 192.7 billion pounds, up 1.8 percent from 2009. While the nations average herd size was nearly 1 percent lower, this was more than offset by 2.8 percent more milk per cow. The Class III price averaged $14.41, $3.05 higher than the $11.36 for 2009; and the U.S. All Milk price averaged $16.30, $3.47 higher than the $13.08 for 2009. Improved milk prices made returns over feed costs much more favorable and producers responded by feeding for higher production per cow.

“Milk prices took a sharp down turn towards year end with the December Class III price dropping to $13.83, down $3.11 from the year's peak in October at $16.94. Milk production was up just 0.9 percent for the first half of 2010, but grew 2.8 percent for the last half. Although domestic sales showed some improvement led by higher cheese sales, and exports were up substantially for all products this was not enough to hold milk prices. Cheese production was relatively high with November cheddar production 6.1 percent higher than a year ago and total cheese production 6.0 percent higher. Nov. 30 stocks of American cheese were 7.3 percent higher than a year ago and total cheese stocks 4.6 percent higher. Despite November butter production 9.8 percent higher than a year ago, with good domestic sales and strong exports Nov. 30 stocks were still less than half that of a year ago.

“As of now it looks like milk prices may not show substantial improvement until the second half of the year. However, dairy product prices have shown considerable strength since the beginning of the year. CME butter which was $1.69 per pound the start of the year improved to $2.10 on Jan. 7 and held at this level as of Jan. 19. CME cheddar barrels were $1.34 start of the year and improved to $1.4475 by Jan. 13, but dropped ½ cents to $1.47 on Jan. 19. CME cheddar blocks went from $1.3425 at the beginning of the year to $1.5025 by Jan. 13, but dropped 2 and ½ cents on Jan. 19 to $1.50. Both nonfat dry milk and dry whey prices are strong with prices in the West at $1.20 to $1.24 per pound for non fat dry milk and $0.38 to more than $0.42 per pound for dry whey. Some question that with the level of milk production and cheese stocks these prices will hold. The drop in cheese prices on Nov. 19 may be an indication that prices will weaken some. At what level these prices will hold over the next few weeks will depend upon the level of milk production and what buyers and sellers see for domestic sales and exports, not only currently, but for the months ahead.

“USDA's release of December milk production shows production still running at a high level. Milk production was 2.5 percent higher than a year ago from 0.6 percent more cows and 1.8 percent more milk per cow. Cow numbers increased 16,000 head from November putting them above year ago levels. The increase in milk per cow was down from earlier months due to some adverse weather in some key states like California. For example, heavy rain and mud stressed cows in California and as a result the increase in milk per cow was 3.5 percent for December compared to 5.4 percent for November. California's milk production for December was 2.7 percent higher than a year ago compared to an increase of 4.5 percent for November. Other Western states continue with rather strong increases in milk production with increased of 8.1 percent for Arizona, 4.9 percent for Idaho, 3.4 percent for New Mexico, 5.0 percent for Texas and 4.0 percent for Washington. In the Northeast, New York's production was up 4.6 percent and Pennsylvania up 1.8 percent. In the Midwest Wisconsin's production was up 0.7 percent, Minnesota had no change and Iowa's production was down 2.4 percent from 3.7 percent fewer cows. Of the 23 reporting states just two others had less milk, Illinois with a decrease of 0.6 percent and Missouri a decrease of 7.9 percent.

“A key for the level of milk production in 2011 will be feed prices. Much higher grain and hay prices will lower returns over feed costs. This is likely to increase cow slaughter and dampen the increase in milk per cow. The growth in milk production ought to slow as we move through the year. But, with the good supply of dairy replacements the average size of the nation's dairy herd may not fall below that of 2010. But with a smaller increase in milk per cow milk production for the year might be up less than 1.5 percent. Some improvement in domestic sales is anticipated and while exports may be lower relatively tight world supplies due to anticipated strong world demand and reduced level of increased milk production in Oceania will keep exports at a historically high level.

“Under this situation we could see the Class III price averaging in the low $14's for the first half of the year and then showing good improvement for the second half with a peak in the low $16's for October or November. With the recent run up in cheese prices Class III dairy futures showed strong increases for all month in 2010. But, with start of lower cheese prices on Nov. 19 and a rather strong December milk production all 2010 months for Class III futures showed weakness at the end of trading on Jan. 19.”