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Dairy Market: Q3 Review & Outlook
By Bob Cropp, Dairy Marketing & Policy Specialist, University of Wisconsin-Madison
The United States Department of Agriculture's report on August milk production shows a continued strong come back in milk production from a year ago due to both more milk cows and strong milk production per cow. August marks the fourth consecutive milk production increase of 4% plus. The relatively favorable milk prices all of 2004 and thus far for 2005 appears to have encouraged some dairy herd expansion. But, much of the decline in cow numbers was offset by improved milk per cow.
Compared to a year ago, August milk production was strong for each of the five leading dairy states and this is significant since these five states produce over half of the nation's milk production. Production was up 2.6% in California, 4.6% in Wisconsin, 5.5% in New York, 13.4% in Idaho and 7.1% in Pennsylvania.
Each state had strong increases in milk per cow of 4.9% to 6.7%, except for California, which showed only a 0.8% increase. Cow numbers were down just slightly in Wisconsin, 0.3% and down 1.0% in New York. But, Idaho showed herd expansion with 8.1% more cows followed by 1.7% more cows in California and 0.4% more for Pennsylvania.
Also in the West, Arizona, New Mexico and Texas had increases in milk production of 2.9%, 6.2% and 10.9% respectively. New Mexico, which had been reporting fewer milk cows since the last CWT program, had recovered to 1.2% more cows in August.
Cow numbers were down 2.2% in Florida, and with only 1.2% more milk per cow, Florida's milk production was down 1.2%. Dairy herd expansion was evident in Michigan with 3.3% more cows and in Ohio with 1.5% more cows. This along with good milk per cow resulted in milk production being up 6.8% in Michigan and 3.7% in Ohio.
In the Upper Midwest, Minnesota continues to lose cows, down 2.2%, but 4.5% more milk per cow resulted in 2.2% more milk. Cow numbers were 3.1% lower in Iowa with 2.4% more milk per cow netting a decrease of 1.0% in total milk production.
We can expect milk production to show recovery for the remainder of the year. Milk cow numbers will likely continue to show some increases, and with cooler fall weather along with a milk-feed price ratio of around 3.0, milk per cow should also remain strong. Dairy replacements remain rather expensive.
This may explain that despite rather favorable slaughter cow prices, South St. Paul prices at $45 to $55 per hundredweight, why dairy cow slaughter numbers have averaged about 6% less than a year ago from January through August. On the feed side, USDA's latest crop report revising corn production upward to 10.6 billion bushels and soybeans upward to 2.856 billion bushels along with more carryover crop will result in favorable grain and concentrate prices. However, quality hay prices will be higher this winter for many key dairy states.
So the question remains, how long will milk prices stay relatively strong? Despite this anticipated recovery in milk production, forecasts are for lower milk prices towards the end of the year and for the first quarter of 2006, but yet well above 5-year average prices. On September 19th, Class III futures settled at $14.30 for September, which was $0.70 higher than the $13.60 August Class III price. Class III futures for October was $14.47 with December Class III still favorable at $13.38 and first quarter 2006 in the mid to high $12.00s.
These prices appear to be relatively favorable in light of the anticipated milk production. More milk means more dairy products are produced. Compared to a year ago, the increases in dairy product production were: Butter 2.3%, cheddar cheese 4.1%, mozzarella cheese 6.9% and all natural cheese combined of 4.0%. There is mixed information on how sales of milk and dairy products are doing to absorb these increases.
The next stock report, which will be released on September 21st for August 31st, may shed some light on this. The latest stock report for July 31st showed stocks of butter 9.8% lower than a year ago and 13.7% lower than the 5-year average for this date. American cheese stocks were 2.7% lower. Total cheese stocks were 5.0% lower than a year ago and only 0.5% higher than the 5-year average for this date. These numbers show good movement of dairy products into the market.
Beverage milk sales, after last year experiencing the biggest decline in 30 years, appear to be at the same level as a year ago. It is uncertain how Hurricane Katrina has and will impact the sale of beverage milk and dairy products as well as the impact of higher gas prices cutting into consumer spending power. The impact on total milk supply from Hurricane Katrina is less of a factor since it didn't affect a major milk production area. Retail prices are favorable. Compared to a year ago, July retail prices for all food was up 2.1% but whole beverage milk was down 8.6%, cheese 1.8% and butter 9.8%.
Up until now cheese, butter, nonfat dry milk and whey product prices have all been favorable for good milk prices. CME cheddar cheese prices had dropped by early August to lows of $1.37 cents per pound for 40-pound blocks and $1.36 per pound for barrels. But, somewhat surprising, price recover was strong with September 19th prices at $1.595 for 40-pound blocks and $1.5350 for barrels. CME butter was $1.74 per pound. Nonfat dry milk is moving at $1.00 or more per pound. Dry whey is at $0.30 to $0.34 per pound and 34% whey protein concentrate at $0.85 to $0.88 per pound.
In summary, milk prices will decline seasonally for November and December and will likely fall below 2005 prices for the first quarter of 2006, but prices will be above the 5-year average. Milk production and milk and dairy product sales will determine milk prices in 2006. But, that probably is for the growth in milk production to keep milk prices below those experienced in 2005. The Class III price will likely peak below $14.00 (CME September 2006 Class III futures was at $13.75) and the average Class III price for the year around $12.25, which would be near the 5-year average.
But, we know milk prices are very sensitive to rather slight changes in production and sales so things could turn out quite different.
Bob Cropp is a dairy marketing and policy specialist with the University of Wisconsin-Madison. He provides a monthly dairy situation and outlook report, conducts research and provides extension programs to dairy producers, dairy cooperatives, related dairy firms and policy makers on milk marketing and federal dairy policy. For article feedback, contact Bob at racropp@wisc.edu
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