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Cropp: December Dairy Situation and Outlook

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By Bob Cropp, Professor Emeritus

University of Wisconsin Cooperative Extension

University of Wisconsin-Madison

 

To see a video of UW-Madison’s Bob Cropp and Mark Stephenson discussing the latest  milk production report and its implication for milk prices in the months ahead, visit the Dairy Markets and Policy website, http://dairy.wisc.edu/PubPod/Podcast/Outlook/Index.html.

 

Milk price are headed lower for December and perhaps for January of next year, driven by lower dairy product prices, particularly for cheese and butter. 

 

On the Chicago Mercantile Exchange (CME), cheddar barrels, at $2/lb. on Nov. 1, had declined to $1.7025 by Dec. 3, and are now down to $1.6375/lb. Cheddar blocks were $2.11/lb. on Nov. 1,  declined to $1.76/lb. on Dec. 3, and are now $1.72/lb. 

 

Various factors may explain this price decline. More milk available for cheese production, as well as higher milk components, has increased total cheese production, particularly in the East and Midwest. Compared to a year ago, October cheddar cheese production was up 6.2% and total cheese production up 3.1%.  Lower milk production reduced California's cheese production by 5.4 million lbs. or 2.8%. But, this was more than offset with Wisconsin's cheese production, up 11.7 million lbs., or 5.3%. Other states having strong increases over a year ago were: Idaho, 6.0%; New York, 5.0%; Minnesota, 8.4%; Iowa, 4.7%; New Mexico, 4.6%; and South Dakota, 11.3%. 

 

Another factor for lower cheese prices was exports. Compared to a year earlier, cheese exports have been higher, with October exports 13% higher, and January-October 20% higher. But, the October exports were nearly a third lower from the peak in May. Cheese exports have been affected by U.S. prices being higher than world prices. In August, for example, Oceania cheddar cheese was $1.61/lb., well below the U.S. price. Since then, U.S. cheese prices have come down, while Oceania prices have increased to more than $1.80/lb., making U.S. exports more attractive. Price assistance by the Cooperatives Working Together (CWT) program has also helped exports. 

 

Finally, holiday orders have been filled, and it is not unusual for cheese prices to decline some in December. However, tightening cheese stocks are positive for cheese prices; Oct. 31 stocks were 6.2% lower

than a year ago.

 

Dry whey prices have held firm in the 61¢-66.5¢/lb. range. While exports have been about 9% lower than a year ago, exports still accounted for 48% of dry whey production. In addition, with the level of exports and

domestic use, Oct. 31 stocks were 37% lower than a year ago. The Class III price is supported by these strong whey prices. Yet, the Class III price, which peaked at $21.02 in October, declined to $20.83/cwt. in November will be down to about $18.65/cwt. for December.

 

CME butter, which was $1.89/lb. on Nov. 1 and had been around $1.59/lb. for most of December, has declined to $1.56/lb. Butter exports, which have been well below year-ago levels (down 18% January through October), were strong in October, up 43% from a year ago, and the highest since May. Oct. 3 butter stocks were 11% higher than a year ago. And like cheese, holiday orders have been filled.

 

Nonfat dry milk prices have been firm, trading in the $1.51-$1.55/lb. range. However, exports have weakened. October exports were 5% lower than a year ago and the lowest since July 2010. Yet, Oct. 31 stocks were 15% lower than a year ago. The combined butter and nonfat dry milk prices will yield a December Class IV price around $18.00/cwt., down from the $18.66/cwt. in November. 

 

As we look into 2013, we could see some further weakening of milk prices. The January Class III price could be near $18.00/cwt., with little change for the Class IV price. But, we can expect some price recovery by February, as cheese demand is usually relatively strong for the month, and cheese and butter buyers may need to refill their stocks. Class III futures still remain rather flat from February on, trading in the $18.35-$18.75/cwt. range. But, there is still the potential for higher prices by summer and fall. It depends heavily upon the level of milk production. And the level of milk production will hinge heavily upon 2013 crop conditions and resulting feed prices.

 

November milk production was somewhat surprising. U.S. milk production was unchanged from a year ago in August, 0.6% lower in September and just 0.1% lower in October. But, November's production was 1.0% higher, the net result of 0.2% fewer milk cows, but milk per cow 1.2% higher. Milk cow numbers, which started to decline in May, actually increased by 7,000 head in November.

 

The regional pattern of milk production remained the same as recent months, with most Western states having lower milk production, with production up in the Midwest and Northeast. California's production was 2.3% lower, but surprisingly the number of milk cows increased by 2,000 head from October. Milk production was down 2.0% for Arizona, 4.0% for New Mexico and 3.7% for Texas. Idaho remained the exception in the West, with production up 2.3%. 

 

In the Midwest, milk production showed relatively strong increases: up 4.7% in Wisconsin, 4.5% in Minnesota and 4.0% in Iowa. Milk cow numbers were unchanged from a year ago for Minnesota, but 0.4% higher for Wisconsin and 2.5% higher for Iowa. Increases in milk per cow were also strong, up 4.2% in Wisconsin, 4.6% in Minnesota and 1.4% in Iowa. Perhaps due to the drought in these states, forage quality may be good, impacting milk per cow. However, as supplies of good quality forage runs shorter into 2013, increases in milk per cow will slow.

 

With milk prices weakening some for December and January, and feed prices still high, U.S. milk production is not likely to show relatively strong increases, at least for the first half of next year. Although a small increase in cow numbers did occur for November, cow numbers are still likely to average lower for 2013 vs. this year. And, margins for dairy producers may still not be at levels that would suggest any strong increase in milk production. With world milk prices increasing some, U.S. dairy exports ought to remain favorable. It now looks like milk prices will average higher for 2013 than this year. But, there exists much uncertainty where milk prices will end up, particularly by summer and fall.

 

Robert Cropp racropp@wisc.edu

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