Cropp: February dairy situation & outlook

By Bob Cropp, Professor Emeritus

University of Wisconsin Cooperative Extension

University Of Wisconsin-Madison

racropp@wisc.edu

Milk prices will be lower for the month of February before starting back up. The Class III price was $18.14/cwt. for January and will be near $17.25/cwt. for February. The Class IV price was $17.62/cwt. in January and will be near $17.50/cwt. for February. 

These lower prices are driven by lower commodity prices. Commodity prices often soften after the first of the year before increasing seasonally towards Easter. On the CME both cheddar barrels and 40lb. blocks have been below their January average of $1.6388/lb. and $1.6965/lb. respectively during all of February. Barrels were a low of $1.5325/lb. on Feb. 4 before starting to increase. Barrels reached $1.63/lb. on Feb. 14, but fell during the last two trading session to $1.63/lb. The 40 lb. blocks held steady at $1.645/lb. from Jan. 24 until Feb. 6 and increased to $1.675/lb. on Feb. 18. But, for the last two trading sessions blocks fell 3¢ to $1.645/lb. With the earlier increases there was hope that this was the start of a higher Class III price for March. Western dry whey prices averaged 60.63¢/lb. in January and have shown weakness since then. Dry whey is now 58¢/lb. Western nonfat dry milk averaged $1.5513/lb. in January, but it also has shown weakness and is now $1.52/lb. Butter was $1.555/lb. from the end of January until Feb. 12, but higher than its January average of $1.4933/lb. Butter has increased to $1.605/lb.

Milk production above year ago levels particularly in Upper Midwest states and some Northeast states has resulted in relatively high increases in dairy product production. December 2012 production compared to December a year earlier showed increases of 20.9% for butter, 6.3% for cheddar cheese with total American cheese up 4.2%, and total cheese production up 3.8%. Dry whey production was up 21.7% and nonfat dry milk production up 35.8%. With the slowdown in sales after the holidays and lower exports, this increase in production increased dairy stocks. Dec. 31 stocks compared to December a year earlier showed butter up 43%. But, while both American cheese and total cheese stocks increased by 4% and 5% respectively from November to December, stocks were 1% lower for American cheese and down only slightly (‐0.1%) for total cheese. Dry whey stocks were 21.7% higher and nonfat dry milk stocks which had increased 42% from November were 9.1% higher.

USDA’s release of January milk production showed milk production continues to run higher than a year ago, but just 0.5% higher. Milk cows were 17,000 head lower than a year ago, for a 0.2% decline. Milk per cow was 0.7% higher. Milk cow numbers, which were declining May through October have increased since then.

Reports are that California’s milk production has improved during February, but January’s production was 4.3% lower than a year ago. California had 2,000 fewer cows and milk per cow was 85 lbs. less. Except for New Mexico, which had 0.4% more milk than a year ago, other Western states all had decreased of 1.3% for Idaho, 1.3% for Arizona, and 1.1% for Texas.

Northeast states are all showing increases in milk production mainly due to better milk per cow. January compared to a year ago shows production up 3.1% in New York, 0.9% in Pennsylvania, 3.6% in Ohio and 3.1% in Michigan. 

Upper Midwest states also had increases. Production was up 2.4% in Iowa, 4.5% in Minnesota and 4.9% in Wisconsin. For Iowa and Minnesota all of the increase was due to more milk per cow. Wisconsin had 5,000 more cows and 80 lbs. more milk per cow.

Milk prices could still start to improve beginning with March. With slow improvement in the economy, sales continue to show growth. The world supply and demand situation is forecasted to remain relatively tight through at least summer, giving opportunity for favorable U.S. exports. So, exports ought to be a positive factor going forward for higher milk prices. And prices normally improve as we approach Easter. Milk production normally peaks around May or June giving rise to higher milk prices summer and fall. 

Dairy cow slaughter continues to run well above a year ago, which should reduce cow numbers for at least the first half of the year. But, up to now despite heavier cow slaughter there exist and inventory of dairy replacements to increase cow numbers. Yet, cow numbers are expected to decrease for the first six months before perhaps starting to increase again during the last half of the year. That is, if milk prices improve and there is some easing of feed prices. 

On Jan. 1sdairy replacements were 2% lower than a year ago, but still at 49.4 per 100 milk cows. But replacements expected to calve within the next 12 months were down 4% from a year ago and averaged 31.8 per 100 milk cows. But, as indicated earlier, the number of replacements has more than offset increased slaughter increasing cow numbers since October. Reports are that there may be more herd liquidations between now and spring, and this could also reduce cow numbers. 

The number of licensed dairy herds declined by 1,960 in 2012 to 49,331 herds. Whether or not the widespread drought of last year comes to an end in 2013 will have a major impact on cow numbers and milk production last half of 2013.

While dairy futures still show rather modest improvement in milk prices, the probability of doing better than this still exists. Current Class III futures show no improvement for March and don’t reach $18/cwt. until June and peaks at $18.55/cwt. for August and September. I still believe $19/cwt. by September and October is still very possible. There are price forecasters who have Class III as high as $20/cwt. by then. And of course there are some who forecast lower prices expecting much stronger milk production second half of the year.

But, I believe the probability is better for higher rather than lower prices. But, recognizing milk prices change with relatively small changes or anticipated changes in milk production, sales or exports all forecasts are possible. This challenges dairy producers and milk processor in managing price risk.