Cropp: January Dairy Situation and OutlookPrint
By Bob Cropp, Professor Emeritus
University of Wisconsin Cooperative Extension
University of Wisconsin-Madison
We enter 2013 with weaker dairy product prices and, as a result, lower milk prices.
The Class III price peaked in October of last year at $21.02/cwt., but declined to $18.66/cwt. for December, will be about $18.10/cwt. for January, and about $17.25/cwt. for February.
The Class IV price peaked in November of last year at $18.66/cwt., declining to $17.83/cwt. for December, and will be about $17.50/cwt. for January and February.
On the Chicago Mercantile Exchange (CME), cheddar barrels started the year at $1.73/lb., but have declined to $1.60/lb.. Cheddar blocks started the year at $1.76 /lb. and have declined to $1.66/lb. Dry whey prices weakened slightly, but are still in the 56¢ to 65¢/lb., giving support to the Class III price.
Butter, which averaged $1.559/lb. in December, declined to $1.4475 on Jan. 10, but showed strength in recent trading, rising to $1.505/lb.
Softer cheese prices may be explained by sales, exports and stocks. Wholesale and retail cheese buyers are waiting to see where prices bottom out before making major new purchases. Cheese exports have also softened. Cheese exports during November were down 8% from November 2011, but annual totals are still 17% higher and a record.
Cheese production has been also increasing, with November production of American-style cheeses 3.8% higher than a year ago, and total cheese production 1.8% higher. This higher production and fewer exports are reflected in cheese stocks. For American cheese Dec. 31 stocks were 4.1% higher than Nov. 30, but 1% lower than a year ago. On Dec. 31, total cheese stocks were 4.9% higher than Nov. 30, but 0.4% lower than a year ago. With cheese sales remaining favorable, cheese buyers will need to start to replenish inventories, which could add to higher cheese prices and the Class III price by March or April.
Butter prices are not likely to increase much until later in the year. Butter exports for November were 22% lower than a year ago. Butter stocks increased 43% from Nov. 30 to Dec. 31, and are 20.1% higher than a year ago.
Nonfat dry milk prices have shown slight weakness, but are still in the $1.52-$1.55/lb. range. Exports have been declining, with November exports down 21% from a year ago. Forecast for world milk production and world dairy product demand points to a rather tight supply-demand situation as we move into summer. This situation will offer opportunities for U.S. exports of nonfat dry milk/skim milk powder, dry whey and whey protein concentrates, giving strength to these product prices. Higher nonfat dry milk prices will increase the Class IV price.
Where milk prices end up in 2013 will depend heavily on the level of milk production. Milk production reached 200.3 billion lbs. last yea, an increase of 2.1% from 2011. Milk cow numbers averaged 9.231 million head, 0.4% higher than the year before, and milk per cow averaged 21,697 lbs., an increase of 1.65%.
With feed costs remaining high and lower milk prices coming into 2013, returns over feed cost low remain rather tight for many dairy producers. The slaughter of milk cows averaged 6.1% higher in 2012 than the year before, the highest level since 1986. The effect of higher feed costs on dairy cow slaughter is more evident on regions that purchase more of their feed than grow their own forages and grain. Milk prices also averaged lower in regions that purchase most of their feed. As a result, dairy cow slaughter was higher than a year before in the Southwest and Northwest, while lower in the Upper Midwest. We can expect dairy cow slaughter to remain relatively high and at a level to decrease the number of milk cows for at least the first half of the year, with the average herd size for the year ending up lower than 2012.
Continued rather tight margins will also slow increases in milk per cow. The net result may be little or no increase in 2013 total milk production over that of 2012. USDA is forecasting no increase. But, so crucial to exactly where milk production ends up in 2013 will be how 2013 crops turn out and resulting feed cost for the last half of the year. Existing drought conditions for much of the U.S. remains a concern.
USDA’s latest report on December milk production, however, shows milk production picking up rather than decreasing. After dropping below year-ago levels for the months of August, September and October, U.S. milk production was 1.2% above a year ago for November and up 1.6% for December. Milk cow numbers had peaked in April and declined by 85,000 head by October. But, despite higher cow slaughter, the ample supply of dairy replacements resulted in milk cow numbers increasing by 11,000 head in November and 16,000 head in December. December milk cow numbers were just 0.1% fewer than a year ago, and milk per cow improved to a 1.7% increase over a year ago.
The increase in December milk production continues to be due to relatively strong increases in the Northeast and Upper Midwest states, while production continues to decrease in the West. Compared to a year ago, December milk production in the Northeast was up 4.2% in New York, 1.2% in Pennsylvania and 5.5% in Michigan. While Michigan added cows, most of the increase in these states was due to more milk per cow.
In the Upper Midwest, milk production was up 4.4% in Minnesota, 2.9% in Iowa and 5.5% in Wisconsin. Both Iowa and Wisconsin added cows along with increases in milk per cow. All of the increase in Minnesota was due to more milk per cow. In contrast, West milk production was 0.3% lower in Arizona, 2.3% lower in California, 0.3% lower in New Mexico and 0.7% lower in Texas. These declines were due to fewer cows, except in California, where cow numbers were unchanged, but there was less milk per cow. Idaho remained the exception in the West, with 1.0% more milk, due to more milk per cow.
With recent weakening of cheese prices, Class III futures also declined. Current Class III futures decline to $16.92/cwt. for March and don’t reach $18/cwt. until May, peaking in August at $18.77/cwt. But, there still is a high probability that Class III prices will end up higher than this. Class III prices even approaching $19/cwt. by late summer and fall are still possible. Class IV prices may also be near $18.00/cwt. by March, perhaps reaching $18.55/cwt. by summer or fall.
These prices can all change rather quickly, with any major differences in milk production, domestic sales or exports. But, to reach these higher prices, the pattern of milk production needs to change from the increases experienced during November and December. As of now, it still looks like 2013 prices could end up averaging more than $1.00 higher than each of the 2012 averages: $17.44/cwt. for Class III; $16.01/cwt. for Class IV; and $18.52/cwt. for the U.S. average all milk price.