Farm milk prices peaked for the year in October. The October Class III price was $16.94, $4.12 higher than a year ago. The November Class III price will drop to around $15.45 and could be no more than the high $13's for December. The continuation of milk production running well above a year ago, ample stocks of cheese, and cheese orders for the holiday season soon to be filled has resulted in a rather sharp drop in cheddar cheese prices. CME 40-pound blocks, which were still at their peak of $1.77 per pound on October 14th, were $1.5975 on November 1st and down to $1.445 on November 18th. Cheddar barrels were at their peak on October 1st at $1.735 per pound, at $1.6275 on November 1st and as of November 18th $1.42. Prices may hold near these levels for the remainder of the year. American cheese sales have been fair being up 0.6% from a year ago January through August with sales of other cheese varieties (the majority of which is Italian varieties) doing much better with a 5.0% increase. Strong cheese exports have been a major factor supporting cheese prices. Third quarter cheese exports were 69% higher than a year ago and 64% higher year-to-date. But, cheese stocks remain relatively high with September 30th American cheese stocks 6.6% higher than a year ago, the largest stocks for this date since 1986, and total cheese stocks 6.3% higher, the largest stocks for this date since 1984.

Although butter prices on the CME have declined from their October 1st peak of $2.235 per pound, prices on November 18th were still at $1.93. Butter sales January through August were up 4.8% from a year ago and butter exports have been very strong. Third quarter butter exports were up 374.2% from a year ago and up 241% year-to-date. September 30th butter stocks were 43.1% lower than a year ago, the lowest September stocks since 2001. But, like for cheese, butter orders for the holidays are being filled and we can expect butter prices to decline towards year end.

Beverage milk sales, which account for about 30% of milk usage, continue to run below a year ago. While organic milk sales, which declined in 2009 and account for about 3.2% of total beverage milk sales, were up 8.0% January through August, but conventional milk sales were 1.8% lower netting a 1.5% decline in total beverage milk sales.

USDA's report on October milk production released today showed the continuation of milk production well above a year ago. Estimated October milk production for the U.S. was 2.9% higher than a year ago. While milk cow numbers peaked at 9.134 million head in July and declined 16,000 head in August, they held at this level through October and are 0.2% higher than a year ago. With much improved returns over feed costs from a year ago, producers responded with feeding cows for higher production. October milk per cow was 2.7% higher than a year ago.

While increases in milk production have slowed considerably in the Upper Midwest they accelerated in the West/Southwest. October milk production was 3.0% lower than a year ago in Iowa, 0.1% lower in Minnesota and just 0.8% higher in Wisconsin. But, increases in the Western/Southwestern states were relatively high with increases of 9.5% in Arizona, 4.3% in California, 8.1% in Colorado, 6.9% in Idaho, 2.0% in New Mexico, 11.4% in Oregon, 3.8% in Texas and 7.1% in Washington. Each of these states had more milk cows except for California which had 1.1% fewer cows. Cow numbers were up 10.2% in Arizona, 5.2% in Colorado, 4.6% in Idaho, 6.1% in Oregon and 5.8% in Washington. Each state, except for Arizona also had relatively strong increase in milk per cow.

In the Northeast, milk production was up 4.7% in New York with 5.2% more milk per cow more than offsetting 0.5% fewer cows. Pennsylvania had 0.4% more cows with 2.5% more milk per cow resulting in 2.9% more milk. Even in the Southeast, Florida had 4.3% more milk. Of the 23 reporting states, just four had less milk production: Illinois -2.5%, Iowa -3.0%, Minnesota -0.1% and Missouri -7.3%.

The growth in milk production is bound to slow in the months ahead. Much higher feed prices and lower milk prices will make returns over feed cost much less favorable. While this situation will not be nearly as bad as what was experienced in 2009, it is likely to slow the increase in milk per cow and encourage heavier culling of milk cows as wells increased sell outs of dairy herds, particularly during the first half of 2011. With the more than ample supply of dairy replacements the average size of the 2011 nation's dairy herd may still end up slightly higher than the 2010 average, and perhaps a 1% plus increase in milk per cow could result in around a 1.5% increase in total milk production compared to an estimated increase of 1.8% for 2010. An anticipated increase in cheese sales should improve domestic milk sales in 2011. Dairy exports are projected to decline in 2011, particularly cheese and butter, but yet remain favorable to providing some support to dairy product prices and milk prices. Considering these factors, as of now it appears that farm milk prices could show considerable strength for the second half of 2011 as compared to the first half. Class III futures are trading below $14.00 first quarter, in the low $14's the second quarter, reaches $15 by July and peaks at $15.50 October and November. I think the probability that prices could do a little better than this is fairly high, especially for the second half of the year after producers respond to deteriorated returns over feed cost experienced early in the year.

Source: Bob Cropp, Professor Emeritus University of Wisconsin Cooperative Extension University of Wisconsin-Madison