Recent declines in milk futures prices a bummer

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Milk futures tumbled last week amid speculation that U.S. dairy producers weren’t cutting production as much as expected.

Most of the sell-off happened in the wake of the U.S. Department of Agriculture’s annual cattle inventory report on Jan. 29. The USDA said replacement milk heifers as of Jan. 1 were up 2 percent from a year earlier, at 4.5 million head.

That was a “bearish signal that milk production may be coming back quicker than anticipated,” said industry consultant Alan Levitt, who writes the CME Group’s daily dairy report.

The January heifer numbers are definitely weighing on the market. The USDA, in its "World Agricultural Supply and Demand Estimates" report released Tuesday morning, raised its milk-production estimate for 2010 due to the higher-than-expected Jan. 1 dairy replacement heifer estimate. The USDA now estimates that all-milk prices will average between $16.20 and $16.90 in 2010.

March Class III milk futures on Chicago-based CME ended last week at $13.55 per hundredweight, down 0.5 percent from $13.62 a week ago. Deferred contracts fell the most, with October futures down 2.5 percent on the week, to $15.32.

At the close of business on Monday, March Class III futures remained at $13.55.

Dairy producers trimmed herds during the past year after overproduction sent milk prices plunging, forcing some out of the business. At the beginning of 2010, the milk-cow herd was 9.08 million head, down 2.7 percent from 9.33 million a year earlier, according to the Jan. 29 USDA report.

The herd liquidation pace eased during the last few months of 2009, which also contributed to recent pressure on milk prices, said Ed Jesse, an agricultural economist at the University of Wisconsin in Madison.

Jesse expects milk prices to bounce back and climb through most of 2010 as producers continue to cull cows and export demand improves.

“There’s evidence we’ll see further cutbacks in milk production and some recovery on the demand side, both domestically and internationally,” Jesse said. “My sense is you’ve still got a lot of dairy farmers out there in a world of hurt. There’s evidence we haven’t seen the end of foreclosures in dairy.”

For 2010, Jesse projects an average “all-milk” price of $17.50 per hundredweight in Wisconsin and $17.25 nationwide, up 34 percent to 35 percent from $13.10 and $12.81, respectively, in 2009.

Prices later this year probably will increase “as long as we continue to see meaningful cutbacks in milk production,” Jesse said.

U.S. milk production is expected to decline to 187.9 billion pounds this year, down 0.7 percent from 189.2 billion last year, according to an estimate from Bob Cropp, professor emeritus and dairy economist at the University of Wisconsin.

More potentially bullish signs came in the USDA’s Dairy Products report Feb. 2, Levitt said. The USDA said total U.S. cheese production in December fell 0.1 percent from the same month a year earlier, to 861 million pounds.

That was the first year-over-year decline in 21 months, Levitt said. Cheddar cheese production fell a “whopping” 8.3 percent, he said.

 

 

 

 



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