Bob Cropp, professor emeritus, University of Wisconsin Cooperative Extension, offers the following comments on the current dairy situation and outlook.

“Milk prices are trending lower than what were earlier forecasted. The Class III price had improved from $9.97 for June and July of last year to $14.98 for December. Once the holiday period is over and cheese orders are filled, cheese prices frequently decline some lowering the Class III price. But, cheese prices and the Class III price are declining more than expected. The Class III price declined to $14.50 for January, $14.28 for February, but will drop below $13.00 for March. Class III futures remain below $13.00 until June and only peak at $15.23 for September. Markets appear to have reacted negatively to the following factors:

  1. Milk cow numbers, which declined month-to-month all of 2009, increased by 3,000 head in January.
  2. Jan. 1 cattle inventory showed dairy replacement numbers 2 percent higher than a year ago with a high ratio of 49.7 replacements per 100 milk cows.
  3. Since the beginning of the year, dairy cow slaughter has been below a year ago (lower January numbers partially due to slaughter of CWT cows in 2009).
  4. Jan. 31 American cheese stocks up 1.8 percent from December and up 11.6 percent from a year ago.
  5. Some softening of world product prices.
  6. Continued softness in restaurant traffic, which is not positive for cheese and butter sales.
  7. After a strong recovery in nonfat dry milk/skim milk powder exports last quarter of 2009, January exports were down 41 percent from a year ago.
  8. In January, USDA was projecting a second consecutive decline in milk production with 2010’s production down about a 0.7 percent;. But, in March, USDA revised their projection to a slight increase in milk production.

“The Class III price has declined following the decline in cheddar cheese prices. Chicago Mercantile Exchange cheddar blocks and cheddar barrels, which were $1.48 per pound and $1.43 per pound, respectively, in early January are now $1.2675 and $1.2625 per pound. West nonfat dry milk was $1.386 per pound early January and is now $1.04. The exception in price declines was butter and dry whey. CME butter was $1.33 per pound early January and is now $1.47. West dry whey has held around $0.40 per pound since the beginning of the year. Both butter and dry whey prices have been supported with increased exports. January exports of butter were up 61 percent from a year ago and dry whey exports were up 35 percent.

“If milk cow numbers start to show a continued decline for the immediate months ahead, offsetting improved milk per cow and netting a significant decline from a year ago in milk production, dairy product prices and milk prices will respond upwards accordingly. With the degree of financial stress and loss of equity experienced by dairy producers last year, and not much improvement with these current prices, there could be a greater decline in cow numbers and milk production for the second half of 2010 that would yield much stronger milk prices.

Improved domestic sales and exports would also be positive for better prices. As of now, the Class III price for 2010 may average around $14.45 and the All Milk Price around $16.20. While these average are an improvement over the 2009 averages of $11.36 for Class III and $12.81 for All Milk Price, dairy producers need better prices to build back lost equity. The probability appears higher for final average prices for 2010 to turn out higher than what is now projected than turning out lower.

“However, USDA’s released milk production report is not positive for higher milk prices. While February U.S. milk cow numbers were estimated to being 2.2 percent lower than a year ago, milk cow numbers increased 3,000 head from December of last year to January and another 3,000 head January to February. With higher milk prices than a year ago, and some lowering of feed costs, returns over feed cost has improved. This may be having an effect on milk per cow which was up a strong 2.3 percent for February over a year ago, netting a slight increase in U.S. milk production of 0.1 percent. In order for milk prices to continue to strengthen milk production needed to drop below year-ago levels. Milk production did drop below year ago levels from August through December of last year with December production down 0.9 percent. But, with January milk production down just 0.5 percent from a year ago, and February production 0.1 percent higher, strengthening of milk prices in the near term is not likely.

“The leading milk-producing state, California, experienced a 4.1 percent decline in milk production last year due to fewer cows and a relatively small increase in milk per cow. But, for February ,California still had 3.4 percent fewer cows, but 2.0 percent more milk per cow netted just a 1.6 percent decline in milk production. Idaho, which had a 1.3 percent decline in 2009 milk production showed 0.5 percent more cows producing 3.0 percent more milk resulting in an increase in milk production of 3.7 percent. Texas showed relatively strong growth in milk production most of 2009 with increases slowing at the end of the year, but yearly production was still up 5.0 percent. However, for February Texas had 4.7 percent fewer cows than a year ago with milk per cow 0.6 percent lower resulting in a decline in milk production of 5.4 percent. Other Western states had reductions in February milk production of 6.8 percent for Arizona, 8.3 percent for Colorado, and 5.0 percent for Mexico. However, the state of Washington had an increase of 6.9 percent in milk production from 2.5 percent more cows and an increase of 4.3 percent per cow.

“...For the Northeast, both Michigan and Ohio continue to show relatively strong increases in milk production of 3.5 percent and 3.0 percent, respectively. However, production was down 0.7 percent for New York and up just 0.1 percent for Pennsylvania. The Midwest continues to show increases in milk production with Indiana up 1.1 percent, Iowa up 0.6 percent, Minnesota up 1.4 percent and Wisconsin up 5.7 percent.”