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

“Farm milk prices have shown strong increases since the beginning of the year. Class III increased from $13.48 in January to $17.00 in February and will be above $19.00 for March. Class IV increased from $16.42 in January to $18.40 in February and will be near $19.70 for March. The U.S. Average All Milk price increased from $16.70 in January to $18.40 for February and will be near $19 for March. But, these prices most likely will be the peak for the year. While butter, nonfat dry milk and dry whey prices are holding up cheese prices turned sharply down. CME butter has been at $2.12 per pound since March 7 before showing some weakness on March 16. As of March 18, butter was $2.07.  Western nonfat dry milk has been in the range of $1.48 to $1.68 and dry whey $0.45 to $0.52. On the CME 40-pound cheddar blocks peaked at $2.02 on March 3, started to show some weakness on March 8 and declined sharply on March 14 and as of March 18 blocks had fallen $0.335 to $1.685. Likewise, CME cheddar barrels peaked at $1.98 on March 3, showed some weakness on March 10 and as of March 18 barrels had fallen $0.28 to $1.70. Near month Class III futures responded with sharp declines as well.

“It now looks like the Class III price will be well below $17 by April and could be in the low $16′s from May to early fall and then recover to the high $16′s or higher. The continuation of strong exports of nonfat dry milk and dry whey are anticipated and should hold up prices of these products to mid summer or early fall. Class IV could approach $20 by April and remain in the $19 range to early fall before falling in the $17 to $18 range. Dry whey could stay in the $0.40 to near $0.50 range until fall which will help to support the Class III price.

“This decline in cheese and Class III prices was not un-expected. Cheese and Class III prices peaked at levels that were unexpected based on the level of cheese stocks, cheese production and the level of milk production. Cheese exports were 60 percent higher in 2010 than the year before and 96 percent higher in January than a year ago which helped to support cheese prices. But, 2010 cheese exports are just 3.7 percent of cheese production while January exports improved to 4.7 percent of production. Cheese production has been well above a year ago with January production of cheddar cheese up 5.6 percent and total cheese production up 5.0 percent. Cheese sales have held up quite well despite higher prices. But, yet American cheese stocks increased slightly from December to January and were 9 percent higher than a year ago as of January 31st and total cheese stocks 7 percent higher, the most for this date since 1987.

“Butter prices may well weaken more but yet remain relatively high. Butter producers have been somewhat reluctant to build up stocks in fear that high butter prices were not sustainable. Butter production increased just 2.7 percent in January over a year ago. Butter stocks increased 46 percent from December to January, but remain 29 percent below a year ago and the lowest stocks for this date since 2005. Butter exports were strong in 2010, up 99 percent from the year before and accounted for about 8 percent of butterfat production. Butter as well as cheese exports for 2011 are expected to be favorable but considerably lower than last year levels.

“Cheese prices could well rebound some increasing the Class III price by summer and fall. But, this will require a slowdown in milk production. USDA’s estimate of February milk production was up 2.4 percent from a year ago for the 23 reporting states and up 2.0 percent for U.S. as a whole. For the U.S. cow numbers did not increase in February but were 0.7 percent higher than a year ago. Increases in milk per cow appear to be slowing some with February’s production per cow 1.3 percent higher than a year ago.

“Of the 23 reporting states 19 had higher milk production than a year ago. The 4 states with less milk production were Illinois -3.2 percent, Missouri -2.7 percent, Utah -0.7 percent and Pennsylvania -0.2 percent. Florida led all states with relative increases in milk production with February’s production 12.2 percent higher than a year ago. All Western states continue with increases in milk production with production up as much as 8.8 percent in Texas, 7.3 percent in Arizona, 5.7 percent in Colorado, and 3.4 percent in Idaho. Production was up just 2.4 percent in California. For the Northeast, as indicated, production was down 0.2 percent in Pennsylvania but 3.8 percent and 2.7 percent higher respectively for New York and Michigan. In the Upper Midwest production was up just 0.5 percent in Wisconsin and 1.2 percent in Iowa with production down 0.8 percent in Minnesota.

“Milk production is likely to show relatively smaller increases as we approach summer. Corn prices remain at high levels. February hay prices at the national level are 15 percent higher than a year ago with prices up as much as 56 percent in California and 39 percent in Idaho. With lower milk prices returns over feed costs will be squeezed encouraging increase herd culling and reduced grain and concentrate feeding. With 3 percent more replacement heifers to calve this year the average number of milk cows for the year may not decline from last year, but a smaller increase in milk per cow could hold the increase in total milk production for the year below 2 percent. Then if domestic sales can continue to show growth as well as favorable dairy exports, Class III prices will strengthen the last half of the year reaching at least the high $16′s. Summer weather conditions for cow comfort and growing conditions for crops will also be an important factor determining were milk prices will be later this year.”

Source: University of Wisconsin Cooperative Extension