Bob Cropp, Professor Emeritus, University of Wisconsin-Madison
Bob Cropp, Professor Emeritus, University of Wisconsin-Madison

Milk prices continue to fall in 2015, and there’s considerably uncertainty as to how milk prices will end up for the rest of the year.

The February 2015 Class III price will be near $15.55/cwt., compared to $16.18/cwt. in January and $17.82/cwt. last December. The February Class III price a year ago was $23.35/cwt.

The February Class IV price will be near $14.00/cwt., up from $13.23/cwt. in January due to some strengthening of butter prices, but down from $16.70/cwt. last December. The February 2014  Class IV price was $23.46/cwt.

A month ago, there were predictions for the Class III price to fall to the low $14’s in first quarter of the year, and not reaching into the $16s until the last half of the year, and averaging about $7/cwt. lower than last year. Class III futures also showed this pattern. However, dairy futures have rallied. Currently Class III futures stay in the $15s through May; in the $16’s through July; and the $17s for the remainder of the year. Class IV futures have also strengthened. Class IV futures are in the $15s to May; $16 for June; and in the $17s for the remainder of the year.

The explanation for this rally is the drought in New Zealand and New Zealand’s forecast for their milk production to be 3% lower in 2015. New Zealand is the leading single-country exporter of dairy products. Also, there is anticipation Russia will lift its ban on dairy imports from the European Union (EU) 28 by August, and that China will resume imports later in the year.

Prices of whole milk powder, skim milk powder and butter have also strengthened on the Global Dairy Trade. However, it seems the impact of some of this would strengthen prices later in the year, rather than for nearby months.

China’s existing dairy stocks must be worked down before China will likely resume any significant imports. Dairy producers in the EU-28 are currently suffering from low milk prices, which will slow their milk production in 2015. While quotas come to an end in the EU in April, some countries have milk production that exceeds existing quotas, and producers face stiff levies if they don’t reduce milk production before April.

A positive for 2015 milk prices to average higher than previous forecasts is the possibility of a smaller increase in this year’s milk production. Previously, USDA was forecasting 2015 milk production to increase 2.8%; that’s now reduced to 2.6%. A 2.6% increase is still a lot of milk.

Domestic sales will show growth, led by a continued increase in cheese sales. But, exports are forecasted to be lower, particularly for butter and cheese. Nonfat dry milk/skim milk powder, dry whey, whey protein concentrates and lactose exports are expected to fare better.

For now, dairy product prices on the Chicago Mercantile Exchange (CME) have been holding at levels higher than earlier predicted (prices listed as of Feb. 22). Butter started February at $1.7625/lb., rallied to $1.8,1 and is now $1.7225/lb. The 40-pound cheddar block price has been around $1.54/lb., and cheddar barrels are above $1.48/lb. Nonfat dry milk fell to a low of 98.75¢/lb. the start of February, and have improved to $1.025/lb. Dry why continues to trade at 45¢/lb.

The latest Dairy Product production report is for December. Compared to a year ago, December butter production was 1.7% lower; American cheese production just 1.9% higher; total cheese production 2.8% higher; and nonfat dry milk production 19.2% higher. Butter and cheese sales held Jan. 31 stocks are only slightly higher than a year ago. Butter stocks were 2.9% higher; American cheese stocks, 0.3% higher; and total cheese stocks, 2.7% higher.

If January is any indication, the increase in milk production for 2015 could well end up lower than earlier forecasts. Last year, milk production July through December was 3.5% higher than the year before, resulting in a 2.4% increase for the year. December’s milk production was 3.1% higher than the year before. However, USDA’s latest Milk Production report estimates January 2015 milk production for the U.S. to be just 2.1% higher than a year ago. Milk cow numbers were 96,000 head higher than a year ago, a 1.0% increase. But, milk per cow was just 1.0% higher.

Of the 23 reporting states, only two had lower January milk production than a year ago: California and New Mexico. California’s milk production was 2.6% lower, the result of 0.1% fewer cows and 2.5% less milk per cow. The effect of the drought and the start of lower milk prices appear to be impacting California’s milk production. New Mexico’s production was 1.9% lower, all due to less milk per cow.

Idaho had 2.5% more cows, but 1.0% less milk per cow, netting a 1.4% increase in milk production. Texas also had 1.0% less milk per cow, but added 5.6% more cows, netting an increase of 4.4% in milk production.

Milk production is rather strong in the Northeast, with increases of 3.7% for New York; 3.0% for Pennsylvania; and 9.6% for Michigan. Pennsylvania had a few less cows, but New York added  cows; and Michigan cow numbers were up 5.8%. Each of the states had increases in milk per cow well above 3.0%.

Milk production was also up rather strong in the Midwest. Production was up 4.9% in Iowa; 3.0% in Minnesota; 3.4% in Wisconsin; and 8.7% in South Dakota. Each of these states had more cows and increases in milk per cow in excess of 3%.

A year ago, the Northeast and the Midwest were experiencing relatively small increases in milk production, due to lower forage quality and very cold temperatures, lowering milk per cow.

Other states with increases in milk production above 6% were Colorado, Indiana and Utah. Kansas had a 5.1% increase.

So milk prices may turn out better than earlier forecast. However, milk production is currently running strong in the Northeast and the Midwest and several other states, and spring flush is still ahead of us.

World dairy product prices appear to have bottomed out and are now improving, but remain lower than U.S. prices. So U.S. dairy exports are not likely to show improvement until the last half of the year. We know milk prices react rather quickly to any bearish or bullish news regarding milk production, domestic sales and exports. So, milk prices can and will no doubt change as these factors change as we move through the year.

 

Robert Cropp

racropp@wisc.edu