Milk production continues to run well above year ago levels. USDA's monthly milk production report estimated U.S. milk production for the November up 2.7% from a year ago. While milk cow numbers declined by 16,000 head in August, remained at that level in September, cows increased by 3,000 head in October and remained at that level in November. November cow numbers were still 0.3% above a year ago. But, the continued strong increase in milk per cow, up 2.3% from a year ago resulted in the 2.7% increase in milk production.

The West is the major contributor to this increased milk production with added cows and relatively high increases in milk per cow. Compared to a year ago November the following Western states had increases of 8.7% in Arizona, 4.5% in California, 7.4% in Colorado, 7.2% in Idaho, 1.9% in New Mexico, 6.0% in Washington and 2.8% in Texas. In the Northeast production was up 4.6% in New York and 3.2% in Pennsylvania. However, compared to a year ago production has slowed in the Upper Midwest. Production was down 1.5% in Minnesota due to 1.6% less milk per cow, down 3.3% in Iowa due to 5.1% fewer cows and down 0.7% in Illinois due to 3.0% fewer cows. Production was up just 0.5% in Wisconsin due to 0.6% more cows but no increase in milk per cow. This is a turn around from a year ago when production was strong in the Upper Midwest while production was either running below a year ago or showing only small increases in the West.

This level of milk production along with just modest growth in commercial disappearance has resulted in declining butter and cheese prices. Butter sales were up 5.2% compared to a year ago from January through September. Other cheese sales, mainly Italian types showed a strong 4.6% increase while sales of American cheese was up just 0.7%. Butter prices have weakened despite October 31st stocks being 43.3% lower than a year ago. Cheese stocks remain rather high with October 31st stocks of American cheese 10.2% higher than a year ago and total cheese stocks 7.0% higher. October butter production was 7.5% higher than a year ago, cheddar cheese production 4.1% higher and total cheese production 3.5% higher. Christmas orders of butter and cheese have now been filled. With production higher and seasonal sales filled prices of butter and cheese normally do decline during December and into January. But, prices have shown significant declines. CME butter peaked at $2.235 per pound on October 1st, declined to $1.53 the end of November, but recovered some to $1.6525 as of December 17th. Cheddar barrels peaked at $1.735 per pound early October, declined to $1.35 mid November, recovered to $1.475 the end of November, but on December 17th they had declined to $1.3650. Similarly cheddar blocks peaked at $1.77 early October, declined to $1.40 on November 11th, recovered to $1.5075 early December but as of December 17th they were $1.3225.

The lower cheese prices have lowered the Class III price. Class III had peaked in October at $16.94 declined to $15.44 in November, and will be down to about $13.70 for December. Class III futures show further declines early 2011, not reaching $14.00 until April and only peaking around $15.50 in October. Nonfat dry milk prices have remained firm in the range of $1.20 to $1.23 per pound in the West which has held up the Class IV price. But, with lower butter prices the Class IV price peaked at $17.15 in October, declined to $16.68 in November and will be about $15.15 for December. The Class IV price may fall below $15.00 early in 2011, but recover and remain above $15.00 for most of 2011. This means the advanced Class IV price will likely be the mover of Class I prices most months during 2011.

Dairy product prices and milk prices would have fallen even more if it had not been for strong exports. Record exports of nonfat dry milk/skim milk powder were posted in October, up 69% from a year ago. Year to date exports were up 48%. October cheese exports were up 63% and year to date up 62%. October butterfat exports were up 11%, but up 168% year to date. Total whey protein exports during October were up 13% and year to date up 32%.

While dairy futures now show rather depressed Class III prices for the first half of the year and only modest recovery for the second half, prices could show much better improvement the second half. The lower milk prices during the first half along with much higher feed costs will result in unfavorable returns over feed costs. This will likely result in heavier culling from the dairy herd and a reduction in the increase in milk per cow. The inability to catch up on all expenses incurred and lost equity incurred during 2009 will likely increase exiting from dairying. The slow down in milk production, some anticipated improvement in domestic sales as well as lower but still good exports all point to a stronger price recovery second half of 2011.

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