The price of butter, cheddar cheese, nonfat dry milk, dry whey and the Class III and IV prices have all experienced strong increases and are much higher than what were forecasted back in early January. Price changes from the beginning of January to their peak in February were: Butter $1.69 to $2.10; CME cheddar barrels $1.34 to $1.9175 as of February 18th; CME 40 pound cheddar blocks $1.3425 to $1.9550 as of February 18th; Western nonfat dry milk from the range of $1.20 to $1.24 to $1.40 to $1.70; and dry whey from a range of $0.29 to $0.42 to $0.43 to $0.50. Butter prices started to show weakness on February 11th and had declined to $2.005 as of February 18th. The January Class III was $13.48 and will be near $17 for February. As of February 18th, Class III futures settled at $18.51 for March, above $17 through September and down to $16.44 for December. The January Class IV was $16.42 and will be near $18.40 for February. As of February 18th, Class IV futures settled in the $20s through August and were down to $17.44 for December. If these prices hold, the advanced Class IV price will be the mover of Class I prices for all of 2011.

This price pattern is the opposite of what was forecasted back early January. It was then assumed that it would take the first half of the year to slow down the growth in milk production as dairy producers slowly adjust cow numbers and milk per cow slows in response to much higher feed prices. Domestic demand, while improving is still held back by a sluggish economy. Dairy exports, which were up substantially for all products in 2010 would decline some in 2011, especially for cheese and butter. And stocks of cheese remained relatively high. The result would be lower milk prices during the first half of the year with much stronger prices for the second half. But, it now looks like the opposite will occur with prices averaging higher for the first half of the year than the second half, and with averages for the year much improved over 2010.

What caused this unexpected run up of prices? The answer is partially explained by several happenings. While milk production is still running well above year ago levels with January's production estimated up 2.3%, evidently some assume that sharply higher corn, soybean and hay prices will soon curtail milk production. While the January livestock inventory showed 3% more dairy replacements that will calve within then next 12 months, attractive slaughter cow prices appears to be encouraging much heavier culling of cows from the herd. Second, while fluid milk sales have not shown growth butter and cheese sales have been quite favorable despite higher prices. Dairy exports may be not as high as 2010, but yet exports of nonfat dry milk/skim milk powder and whey proteins look very favorable as well as good exports for cheese and butter. World stocks of butter and milk powders are currently tight. High world feed prices are also likely to slow the growth in world milk production. Australia and New Zealand, which account for about 40% of world dairy trade, have scaled back anticipated milk production for the year due to adverse weather that has impacted pasture conditions. And improvement in the world economy has increased the demand for dairy products and at higher prices than in past years.  The net result is that it appears that buyers are anticipating considerably tighter supplies of milk and dairy products for the immediate months ahead and have been aggressive in bidding up prices.

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.