October’s 1.1% Milk Production Drop Largest Year-Over-Year Decline Since 2004

October’s 1.1% drop in U.S. milk production should be good news for an industry that has staggered through 2009 burdened partly by a milk supply that exceeded demand.

“The report is significant because, for the first time, 2009 is below 2008 in total milk production” in a noteworthy way, says Andrew Novakovic, professor of agricultural economics at Cornell University. “The decrease is absolutely essential if we’re going to see any kind of up-tick in prices.”

USDA’s National Agricultural Statistics Service reported today that milk production in the 23 major dairy states during October totaled 14.3 billion pounds, down 1.1% from October 2008. September’s revised production at 14.0 billion pounds fell 0.5% from September 2008.

The October 2009 decline marked the largest year-over-year drop in milk output since March 2004, Novakovic says.

The market may view today’s report as more of a reduction than it expected, which could spur a bounce in milk futures, adds Novakovic. Even so, he predicts that 2010 will be “better but not great,” particularly for those dairy producers who rely on purchased feed, which has soared sharply higher in cost in the last few years. Novakovic believes the U.S. is likely to harvest a smaller corn crop this year, increasing prices for the yellow-eared commodity.

A drop in cow numbers also contributed to the lower milk production. USDA reported that cow numbers in the 23 major states decreased to 8.32 million head, down 196,000 head from October 2008 and 22,000 head fewer than in September 2009. The total U.S. herd size has shrunk by some 226,000 head since October 2008.

“That’s in the range of reduction we thought was needed to see an improvement in price,” says Tiffany LaMendola, director of economic analysis for Western United Dairymen, an industry trade organization based in Modesto, Calif. “And we are seeing prices improve, but we still have a long way to go.”

Also significant in today’s USDA milk production report are the dramatic and ongoing differences in regional output, says Brian Gould, an associate professor in the Department of Agricultural and Applied Economics at the University of Wisconsin.

“There’s no doubt that all producers have been hurt this year, but the adjustments in California have been much more dramatic than in Wisconsin,” Gould says.

The Golden State‘s milk production dropped by 5.3% in October, while Wisconsin‘s rose 3.5%. California still leads the nation in milk output, producing 3.207 billion pounds last month. Wisconsin continues as the nation’s No. 2 milk producer at 2.107 billion pounds.

California‘s drop in output results from this year’s severe financial pressures and negative margins, predominantly from high production costs, LaMendola says. Production caps that processors implemented in California last year may have helped decrease the state’s milk production in 2008 but were not the reason for this year’s smaller output.

October’s decrease marked the 15^th time in 16 months that California has cut back milk production, says LaMendola. While producers in some states received help from MILC payments that amounted to about $1.50/cwt. through much of 2009, California producers “capped out in one to two months at the beginning of the year,” limiting assistance through the downturn, LaMendola said.

California, like other states that rely on purchased feed, has felt the crushing impact of high corn and hay costs. Those dairies have been forced to downsize operations or retire herds through the Cooperatives Working Together program. Among major dairy states that saw notable production declines in today’s report:

· Arizona -10.6%

· Colorado -8.9%

· Idaho -1.4%

· New York -1.5%

States that don’t face as high feed costs have more opportunity for expansion and adding cows, says dairy economist John Kaczor, who writes a weekly market comment for California’s Milk Producers Council. In addition, some of those states have plants that want more milk, he adds. That may account for increased production in states like:

· Indiana +4.4%,

· Ohio +3.1%,

· Illinois +3.3%

· Minnesota +2.5%

Read today’s USDA-NASS report at: http://usda.mannlib.cornell.edu/usda/current/MilkProd/MilkProd-11-18-2009.pdf.

Catherine Merlo is Western editor for Dairy Today. You can reach her at cmerlo@farmjournal.com.