The U.S. milk cow herd increased in January for the first time in at least a year, suggesting some producers see profitable times returning following a prolonged slump.

The nation’s milk cow herd at the end of January rose to 9.085 million head from 9.082 million at the end of December, USDA says in its monthly "Milk Production" report. January’s milk cow herd was still down 2.4 percent from a year ago.

Dairy producers cut cow herds in every month last year, compared with the previous month, in an effort to stem widespread losses from a tumble in milk prices. January’s cow herd increase, while small, is a bearish signal for milk prices, industry analyst Alan Levitt says.

“If we’re adding cows when the market seems pretty weak, that’s probably a bearish sign,” says Levitt, who writes CME Group’s Daily Dairy Report. “It’s an indication we’ve changed direction. We’re not taking cows out as much.”

Levitt says some producers late last year, seeing the potential for higher price and profitability in 2010, may have started adding to herds.

“Maybe that was premature,” Levitt adds. “To think that we might go back into an expansion phase is a little troubling.”

USDA also says nationwide milk production declined 0.6 percent in January compared with the same month in 2009, to 16.04 billion pounds.

At the same time, production per cow continues to climb. Cows in the 23 major dairy states averaged 1,782 pounds for January, up 30 pounds, or 1.7 percent, January 2009.

For all of 2009, U.S. milk production totaled 189 billion pounds, 0.3 percent below 2008.

There are signs posted on Interstate 70 that warn truckers not to be fooled or become overly optimistic as they come down the mountains into Denver. One sign reads, “Truckers you are not done yet, another 1 ½ miles of steep grades and sharp curves to go.”

It appears that some people in the dairy industry have become overly optimistic as they try to come out of a stretch of tough economic sledding. Last Friday, the USDA announced that the U.S. milk-cow herd had increased in January for the first time in at least a year.

It is a bearish sign, as noted by market analyst Alan Levitt in the story above.  

The market has not reacted very favorably. On Monday, block cheese on the Chicago Mercantile Exchange dropped 1.75 cents per pound and remained steady on Tuesday. The problem is that it is now below $1.40 per pound after having reached $1.70 in mid-December. Most of the Class III futures contracts had a bad day on Monday, and then some of the nearer ones (through July) rebounded a bit on Tuesday. 

I tend to believe that in order for the industry to become really profitable again, the national herd needs to get down to 8.9 million. At 9.085 million, it still has a ways to go. — Tom Quaife, editor.