In 2010, dairy farmers received some much-needed relief from the devastating milk prices of 2009. At its low in 2009, the U.S. all milk price hit $11.30 per hundredweight and averaged $12.83 for the year. For 2010, the U.S. all milk price averaged $16.30, a $3.47 improvement over the previous year. The Wisconsin all milk price averaged $16.18, up $3.10 from 2009. The Wisconsin price saw a smaller gain because the Class IV milk price was higher than class III during most of 2010. This provided a relative price premium to regions with high Class IV and fluid milk utilization—most of Wisconsin’s milk is used for class III (cheese) products.

Milk Supply

Dairy producers responded to the extraordinary high milk prices of 2007-08 by adding cows. The resulting increased milk production was a logical market response to those high prices, but unfortunately, the added milk hit the market just as the world slid into economic recession. The milk price collapse in 2009 was the result of high domestic milk production coupled with a decline in domestic and export demand for dairy products. It was the first year since 1991 that we have seen a decline in commercial disappearance of dairy products.

The milk price was so low during 2009 that for many producers, the variable costs of production were higher than the milk price. In fact, many producers who buy all of their feed found that in several months, their milk price did not cover their feed costs. If a dairy farm were a factory, under these circumstances the only rational response to such market signals would be to shut down until prices recover. With milk cows, it’s not so easy.

Some producers did go out of business. But many more producers took a hard look at each cow in their herds to see if she was covering her individual costs. As a result, a large number of cows were culled, most of them from herds in western states, where purchased feeds comprise a much higher share of variable costs. Moderating milk prices in 2010 stopped this downsizing and actually caused cow numbers to increase somewhat. The average annual dairy cow herd in 2010 is estimated at 9.1 million head, 1 percent smaller than in 2009. The other factor determining the volume of milk produced is production per cow, which is heavily influenced by feed costs. Feed prices began to increase in 2007, following a rise in corn prices tied to expanded demand from ethanol plants. Feed prices hit a peak in 2008 and, although they moderated, they seemed to find a new, higher plateau. Milk per cow showed only modest gains from 2007 through 2009. However, genetic gains continued to accrue over that period, and when milk prices increased in 2010, and returns over feed costs improved, so did milk per cow. U.S average milk per cow will average near 21,150 pounds, up 2.8 percent from the 20,576 pounds in 2009.

Higher cow numbers coupled with increased milk per cow has reversed the loss in milk production that occurred in 2009, when production fell to 189.32 billion pounds, 0.3 percent below 2008 levels. Production for 2010 is estimated at 192.7 billion pounds, an increase of 1.8 percent. Western states led the increase in cow numbers, milk per cow and total milk production in 2010 as their producers saw improved returns over feed costs. States like Arizona, California, Idaho and Washington had fewer cows, less milk per cow and less milk production in 2009. This all reversed in 2010, as cow numbers stabilized in California and increased in Arizona, Idaho and Washington. Higher milk yields further pushed up milk production. For example, November 2010 production was up over November 2009 by 8.7 percent for Arizona, 4.5 percent for California, 7.2 percent for Idaho and 6 percent for Washington.

While November production for Wisconsin was up just 0.5 percent, production for the year will show a stronger increase. For 2010, Wisconsin average dairy cow numbers averaged about 1.262 million head (up 0.4 percent) average milk per cow was about 20,630 pounds (up 2.7 percent) and total milk production was more than 26 billion pounds (up 3.2 percent). This continues a mid-decade turnaround inproduction and cow numbers. The downward trend in Wisconsin’s milk production starting in 1989 reversed in 2005 and the decline in cow numbers reversed in 2006. Since 2004 production has increased almost 4 billion pounds, or 18 percent. Cow numbers have increased 26,000 head, or 2 percent, since 2005.

Dairy Product Demand

The great recession, which began in the United States in December 2007, was global in nature and had a major impact on the U.S. dairy industry. As U.S. unemployment rose, the number of meals eaten away from home diminished significantly, and as a result, sales of manufactured dairy products used heavily in restaurants fell off. There were a few bright spots. Fluid milk consumption increased in 2009, which analysts attribute to families rediscovering their dining room table—they were eating at home more, so they stuck an extra gallon of milk in their shopping carts. But low fluid milk prices also helped. In 2010, higher prices seem to have reduced fluid consumption back to pre-2009 levels. Total fluid milk sales from January through September were down 1.5 percent.

The restaurant Performance index (RPI) tells us something about dairy product consumption and may also be a leading indicator of the health of the general economy. The RPI is based on reports from several thousand restaurants ranging from fine dining to fast food. An index value above 100 indicates expansion of the restaurant industry, while a number less than 100 suggests contraction. the RPI began to slide in 2007, long before the general population was aware of a looming recession. People were eating out less as incomes were becoming stretched. Currently, the RPI has been increasing and has had a few months above the 100 level, indicating some expansion. This is good news for cheese and butter sales, as the restaurant trade is a major outlet for these products. Butter sales were up more than 5 percent in 2010. While American cheese sales were up less than 1 percent other cheeses, mainly Italian varieties were up 4.6 percent. USDA estimates that 2010 domestic sales of milk and dairy products to be up just 0.6 percent on a fat equivalent basis and 0.9 percent lower on a skim-solids equivalent basis.

While domestic markets account for about 90 percent of dairy product sales, the industry is looking more to exports as a source of revenue. The potential for domestic sales growth is likely limited by modest increases in per capita consumption and slow population growth. Consequently, exports are a portal for more significant growth in sales. For many years, export sales accounted for 3-4 percent of our total milk supply—and less in value than our imports of dairy products. In 2007 and 2008, for several reasons, our exports surged to more than 10 percent of our milk production and the value of U.S. dairy exports was substantially greater than imports.

Exports collapsed in 2009. The soft economies in other countries would not allow them the luxury of importing as much dairy product and tight credit made banks hesitant to issue letters of credit to importers. But, exports remained high by historical standards at nearly 9 percent of milk production. The economies of many of our foreign customers have rebounded more rapidly than our own, and in 2010, exports were comparable to the high levels of 2008. Compared to a year earlier, 2010 January–October exports were up 67 percent for nonfat dry milk/skim milk powder, 26 percent for whey proteins, 63 percent for cheese, 27 percent for lactose and 112 percent for butterfat. For the year, USDA estimates dairy exports will be up 82 percent on a fat equivalent basis and up 40 percent on a skim-solids equivalent basis.

Dairy Stocks

Commercial stocks of butter in 2010 dipped to some of the lowest levels since 2001, while natural cheese stocks were among the highest levels since the mid-1980s. October 31 butter stocks were down 43 percent from 2009 levels, while American cheese stocks were up 10 percent and total cheese stocks were up 7 percent. Several factors account for this big difference in inventory changes for butter and cheese.

Butterfat production was depressed in this country and across the globe. Feed quality was probably a factor, but so were unusually high global temperatures. January through September, 2010 was tied with the same period in 1988 as the warmest on record. September also marked the first time in modern history that the Northwest Passage and the Northern Sea route were ice free. In the United States, several summer months that were the hottest on record for states east of the Continental Divide. Excessive heat in Eastern Europe and Russia caused widespread drought and crop failure, and milk production in those regions suffered as well. Russia imported a significant amount of butter—much of it from the United States—to make up for a shortfall in their production. The combination of less butterfat being produced and greater export demand increased the price of butter dramatically. As for cheese, heading into 2010, milk production levels were strong but domestic and export demand was down from previous years. Much of the extra milk production found its way into cheese vats, causing the largest expansion in cheese production since 2006. as the year progressed, a significant amount of cheese was exported, but not enough to keep stocks at a comfortable level. But in spite of record stocks, cheese prices remained strong for much of 2010. They peaked early in October but fell off sharply in November with further declines through the end of the year.

Source: University of Wisconsin Cooperative Extension