The December Milk Production report will be released on January 24th and closes out another year of milk production information. Surprisingly as it may seem, production has been running below the previous year only since July. The first half of 2023 showed milk production at 0.7% above the same period in 2022. The second half of the year showed milk production down 0.6% with December production likely adding another month of decline. The year may show milk production very similar to 2022 when the final numbers are recorded.
USDA estimated milk production for 2023 on the recent World Agricultural Supply and Demand report at 226.6 billion pounds compared to 2022 when it was 226.5 billion pounds. Also in the report, milk output for this year is estimated at 228.3 billion pounds, another record output. So, the question is asked, “Why is milk production remaining as high as it is even with low milk prices and farms going out of business?” Cow numbers in November were 44,000 head less than in November 2022, yet milk production is nearly on par with 2022. The main reason is milk production per cow has been holding well which has reduced cow numbers from having a substantial impact on the market as you can see in the chart below.
An extended period of low milk prices may harm milk output as more farms may exit the dairy business and milk supply tightens. There may be a point at which prolonged low milk prices will reduce supply. It may take longer than it once did due to more farms increasing in size and being better able to handle lower milk prices for a longer duration. If farms have implemented risk management strategies using the markets or insurance products such as LGM Dairy or Dairy Revenue Protection, it puts them in a much better position to maintain some profitability or higher cash flow than those who do not. I have said it before and will say it again, risk management is as important as anything else you can do on your farm.
It is uncertain as to how long low milk prices will remain. Milk futures show better prices to some extent as the year progresses, but if underlying cash prices remain in a choppy sideways pattern for an extended period, subsequent milk futures will roll down as futures need to converge to cash. Unless demand improves, milk production declines, or both, the market may remain range-bound and lower milk prices will continue.
The butter price has performed better than cheese keeping Class IV futures higher. However, plentiful cream supplies are keeping churns busy. And even though retail demand is good, inventory is running above year-earlier levels and growing. This may result in the butter price falling back to the price level of the first half of 2023. This will reduce the current premium Class IV futures have over Class III.
For more on milk prices, read:
- Global Demand for Cheese Continues to Climb
- Dairy Farmers Could Face Another Year of Disturbingly Low Milk Prices
- Mexico’s Dairy Demand to Grow in 2024
- World Milk Production Begins New Year Weak
- Whey Market Appears to be Tightening
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
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