But, we know that prices are very response to rather small changes in production, domestic sales or exports. It is far from certain that prices will end the year as now shown by dairy futures. To hold prices as currently shown by dairy futures milk production will need to slow down from what has been occurring for the past few months. Weather can be a key factor. Not only can weather have a significant impact on milk per cow this summer, weather conditions for the 2011 crop planting and growing season will greatly impact crop prices and feed costs for dairy producers later this year. USDA's release of January milk production showed milk per cow up 1.5% from a year ago and the number of milk cows 0.7% higher. Despite heavier culling of cows from the herd, the good supply of dairy replacements has kept the number of cows increasing from month to month starting back last October. Good slaughter cow prices and lower heifer prices makes it more affordable to purchase replacements.
Except for California, compared to a year ago January milk production in the West was running well above a year ago. California had just a 0.7% increase in production due to milk per cow being up just 1.3% compared to a 3.2% increase back in December. Stress from wet weather and perhaps high feed prices is slowing down increases in milk per cow. But, other Western states had relatively high increases with production up 8.8% in Arizona, 8.5% in Colorado, 5.3% in Idaho, 6.1% in New Mexico, 7.7% in Texas, 4.1% in Oregon and 2.3% in Washington. Each of these states had added cows from a year ago. Other states with relatively high increases in milk production were: Florida +8.8%, Kansas 7.8%, New York 4.4%, Michigan 3.5% and Indiana 3.2%. Production was up 1.6% in Wisconsin but down 0.3% in Minnesota.
Besides a slow down in milk production for these higher prices to hold domestic sales as well as dairy exports will need to hold close to what is currently projected. As of now, with the exception of fluid milk, higher wholesale and retail prices appear to not have dampened dairy product sales. But, in the past higher prices have slowed down sales. So we could experience some of the same again now. Restaurant traffic will be an important factor for holding up butter and cheese sales and their prices. Dairy exports look promising as previously indicated.
In summary, 2011 appears to be shaping up to being a much better year than earlier predicted with much higher milk prices for the first half of the year, and while lower prices for the second half, they could still average higher than prices experienced the second half of 2010. Dairy producers should evaluate their price risk management strategies and decide whether to protect the price on a portion of their future milk production with opportunities now provided on the futures market. It also needs to be pointed out that despite higher milk prices, with much higher feed costs returns over feed costs will not show the same degree of improvement, especially for those dairy producers who purchase a majority of their feed.