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

“Although the latest USDA dairy stock report and dairy product report indicate there is plenty of cheese around and sales reports are mixed, cheese prices on the Chicago Mercantile Exchange (CME) have continued to increase the past couple of weeks. May 31 stocks of American cheese were still 5.3 percent higher than a year ago and most since 1986 for this time of the year. Total cheese stocks were 5.0 percent higher and the most for May since 1984. The production of American cheese for May was 0.3 percent higher than a year ago with production of all cheese 2.5 percent higher. The latest sales data show American cheese sales 0.6 percent lower than a year ago for the period of January through April and the sales of other cheese (mostly Italian) up 4.1 percent. The increase in meals at home has increased the demand for mozzarella cheese on frozen pizzas as well as reports of improved pizza sales by restaurants. But, 40-pound cheddar blocks on the CME which were $1.43 per pound the start of July improved to $1.5775 as of July 19. Barrel cheese went from $1.40 per pound the start of July to $1.5250.

“Whether cheese prices will hold at these levels, and/or increase further this summer and fall, will depend upon the level of milk production, domestic sales and exports. Recent hot and humid weather in the Northeast, Middle Atlantic and the Upper Midwest is lowering milk per cow. Butterfat and protein levels are also depressed reducing the yield of cheese per hundredweight of milk. Cheese exports for May were up 105 percent from a year ago and up 55 percent for the first 5 months of the year. Cheese buyers may be attempting to increase their inventories in anticipation that supplies will tighten and prices will increase further. 

“As of May 19, butter on the CME was $1.78 per pound, the highest since the fall of 2004. Cream supplies are tight putting May butter production 5.6 percent below a year ago. May 31 butter stocks were 16.5 percent below a year ago. Butterfat exports increased 266 percent over a year ago for the month of May. But, at these prices butter could face some sales resistance. Nonfat dry milk prices are showing some softness as world prices weaken. Exports remained good with May exports 98 percent higher than a year ago and the most since June of 2008. Dry whey prices are holding. May exports of whey proteins were 54 percent higher than a year ago.

“Fluid (beverage) milk sales which improved a year ago are now lower. Compared to May a year ago, fluid sales were 0.7 percent lower with year to date sales 1.1 percent lower.

“However, milk production continues to run well above year ago levels. USDA estimates milk production for the U.S. during June was up 2.4 percent from a year ago. While milk cow numbers were 1.2 percent less than a year ago, milk per cow was 3.7 percent higher. Milk cow numbers have been increasing month to month with numbers up by 40,000 head or 0.4 percent since the end of last year. For the April through June quarter milk production was 1.7 percent higher than a year ago.

“Comparing June milk production to a year ago, some states had relatively strong increases in milk production. For example, California’s production was up 3.5 percent -- the result of 1.1 percent fewer cows being more than offset by 5.4 percent more milk per cow. Idaho also had 3.5 percent more milk, the combination of more cows and higher milk per cow. Arizona had 1.1 percent fewer cows but 5.4 percent more milk per cow netting 4.4 percent more milk. Michigan had 4.7 percent more milk, Wisconsin 5.1 percent and Minnesota 2.1 percent, each due to more cows and higher production per cow. New Mexico had 1.6 percent fewer cows but 1.5 percent more milk per cow netted 0.9 percent more milk. Texas had 4.2 percent fewer cows that were not offset by the 3.8 percent more milk per cow netting 0.5 percent less milk production. In the Northeast, New York had just 0.2 percent more milk from 2.1 percent fewer cows being offset by 2.4 percent more milk per cow. Pennsylvania had 0.7 percent fewer cows with 1.8 percent more milk per cow netting 1.1 percent more milk. In the Southeast, Florida had 1.1 percent more milk from 0.9 percent fewer cows with 2.0 percent more milk per cow.

“The Class III price was $13.62 for June and will be near $13.80 for July. The Class IV price for June was $15.45 and will weaken some to around $15.25 for July. Class III futures are still settling below $15.00 for the rest of this year and all of 2011. Cheese needs to reach at least $1.60 per pound to get the Class III price over $15 and at least $1.70 per pound for a Class III price over $16. Cheese near or above $1.60 is very possible by fall. But, milk production needs to show a slower growth rate. The 10th round of CWT will remove more than 34,000 cows, which will help to reduce cow numbers. But, the more than ample supply of dairy replacements and cow slaughter running as much as 15 percent lower than a year ago in recent weeks does not help to reduce the cow herd. Corn prices have shown some strength, but soybean meal and hay prices are lower than a year ago.

Thus, with improved milk prices (more than $4 per hundredweight higher than a year ago) and lower overall feed costs, returns over feed costs are much more favorable. As a result, some dairy producers are producing all the milk they can to pay off accumulated expenses incurred during last year due to very depressed milk prices. Mandatory supply-management bills have been submitted in the House and the Senate as well as other supply-management proposals being offered. These bills and proposals establish a base milk production for each producer. Perhaps some dairy producers are maintaining a level of milk production to have a good milk base, if supply management does come into play.”