Class III milk prices could average $17 this year

Last year, milk prices were well above 2010 and set a new record, surpassing the previous record set back in 2007. The Class III price averaged $18.37, compared to $14.41 in 2010. And the U.S. all-milk price averaged $20.14, compared to $16.26 in 2010.

Class III milk prices could average $17 this year

Nevertheless, record-high feed cost made for little improvement in margins over feed costs.

Using the method by the Foundation for the Future to calculate margins over feed cost per hundredweight of milk, 2009 margins were $3.54, which improved to $7.36 in 2010, and are estimated at $7.40 for 2011. (The Foundation for the Future uses the U.S. all-milk minus the total feed cost per hundredweight of milk for a typical dairy herd, including replacements, using the price of corn, soybean meal and alfalfa hay.)

The record-high milk prices in 2011 were supported by an increase in milk production of just 1.7 percent. Beverage milk sales slipped 1.5 percent and butter and cheese sales were favorable. But, more importantly, strong U.S. dairy exports totaling about 13.5 percent of U.S. milk production on a total solids basis was a major factor.

Forecasting milk prices is never certain. Milk prices can quickly change as new market factors emerge. For example, 2011 milk prices turned out much higher than anyone forecast at the beginning of the year due to much stronger exports than anticipated. As of now, market factors point to lower average milk prices in 2012. But, how final prices turn out will again depend upon the level of milk production, domestic sales and dairy exports.

Class III milk prices could average $17 this year

Feed prices will average lower, but remain relatively high. With lower milk prices, margins over feed costs may also be lower than 2011. This should have two effects: (1) dampen increases in milk per cow and (2) higher culling of milk cows may stop the growth in the nation's cow herd.

With favorable slaughter cow prices, the nation's cow herd could decline slightly. Milk cow numbers increased month-to-month starting back in October of 2010 up until the last quarter of 2011 when numbers started to decline slightly. While dairy cow slaughter has been running 4 to 5 percent higher, the number of dairy replacements at about 50 per 100 milk cows is much more than adequate to maintain cow numbers. The nation's cow herd for 2012 could average 9.185 million head, down 0.2 percent from 2011.

Milk per cow could increase about 1.4 percent to 21,610 pounds. This would put total milk production at 198.5 billion pounds, an increase of just 1.2 percent, which would be bullish for milk prices.

The economy is projected to show only modest growth in 2012 with unemployment down slightly. Consumer confidence improved recently, but still remains weak. Increases in retail dairy product prices should be modest. Restaurant traffic is also expected to show modest improvement. These factors spell just a modest increase in total domestic milk and dairy product sales.

With good recovery in New Zealand and Oceania milk production, which accounts for about 40 percent of world dairy trade, the world milk supply will be larger and world dairy product prices lower. U.S. dairy exports, while still favorable, could be a little lower than 2011 or at least not show much growth. The uncertainty as to how Europe's economic difficulties play out — and its impact on other world economies and the value of the U.S. dollar — is an uncertain factor that could affect the level of dairy exports.

Cheese stocks entering 2012 will be improved, which is bullish for milk prices. As of Nov. 30, stocks of American cheese were down 6.2 percent from a year ago and total natural cheese stocks fell below one billion pounds, the first time since February 2010, and were 3.3 percent below a year ago. Butter stocks were 35.7 percent higher than a year ago, but still 18.7 percent lower than the five-year average for this date.

Cheese and butter prices ended 2011 on the down side, which is normal after holiday orders are filled by early December. CME cheddar blocks and cheddar barrels both averaged over $2 per pound during June and July, but averaged just $1.655 and $1.617, respectively, for December. Dry whey prices strengthened all year long, going from an average of $0.41 per pound in January and ending the year at $0.65 per pound, which adds support to the Class III price. CME butter averaged over $2 per pound January through August, but was down to $1.62 for December. Nonfat dry milk averaged over $1.60 per pound May through July and ended the year at $1.40 per pound.

With these lower dairy product prices, first-quarter milk prices will average as much as $2 per hundredweight lower than averages for the last quarter of last year. But we can expect dairy product prices to start to strengthen by third quarter and into the fall, increasing milk prices.

The Class III price for the year could average near $17.00, the Class IV price near $17.05, and the U.S. all-milk price near $18.70. But I think the probability that prices could actually do a little better than this is fairly high.

Bob Cropp is professor emeritus and dairy marketing specialist at the University of Wisconsin.



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