Cropp: Dairy Situation and Outlook

Milk production is likely to increase in the last half of 2013, but strong exports should support prices, according to the latest Dairy Situation and Outlook from Bob Cropp, professor emeritus with the University of Wisconsin-Madison.

Milk prices are much improved over a year ago. With cheese prices averaging higher in May than April, and steady dry whey prices, the May 2013 Class III price will be near $18.60/cwt., compared to $17.59/cwt. for April and $15.23/cwt. for May a year ago.

Cheese prices should improve by mid-summer and fall pushing the Class III price above $19.00/cwt., August through October. If milk production improves by fall as now anticipated, the Class III price will fall, but should stay above $18/cwt. for the remainder of the year, and should not fall below $18 until the first quarter of 2014.

The May 2013 Class IV price will be near $18.80/cwt. compared to $18.10/cwt. for April and $13.55/cwt. for May a year ago. Anticipated increases in nonfat dry milk/skim milk powder exports, as well as butter exports,  should strengthen prices, pushing the Class IV price above $19/cwt. July through October or November, and ending the year in the mid-$18/cwt.

With higher milk prices and lower feed costs we can expect milk production to pick up for the last half of the year. A year ago milk production was running strong, with first-quarter production 4.1% higher (adjusted for leap year), and April production 3.5% higher. This year, first-quarter production was even with a year ago, and April production only 0.2% higher than a year ago.

April production compared to a year ago for individual states showed similar production patterns as in the past few months, with production lower for many Western states, and increases for the Northeast and Upper Midwest.

Production changes for individual states were as follows: Arizona (-1.7%); California (-0.2%); Idaho (+0.5%); New Mexico (-2.5%); Texas (-3.2%); New York (+1.7%); Pennsylvania (unchanged); Michigan (+1.3%); Iowa (+1.0%);  Minnesota (+1.8%); and Wisconsin +1.3%. However, the relative declines in Western production have slowed for most states like California, where production was 3.5% lower than a year ago in March. Also March increases for Upper Midwest states were lower than April's, with Minnesota and Wisconsin production 2.3% and 3.0% higher than a year ago.

Last year the growth in milk production started to slow by May, with production falling below year-ago levels in August, September and October, followed by increases above 1% for the remainder of the year. This year we can expect production to run a good 1% higher for the last half of the year, putting the increase for the entire year a little more than 1%.

Dairy product prices have shown some weakness during May, particularly cheese and butter. 

On the Chicago Mercantile Exchange (CME), cheddar barrels were as high as $1.7875/lb. on April 18, but started May at $1.67/lb. Cheddar blocks started May at $1.90/lb., putting the spread between blocks and barrels at 23¢, much wider than the more normal 3¢-4¢ spread. Barrels showed strength increasing to $1.77/lb. by May 17. Blocks increased to $1.915/lb. on May 6, and then declined and were $1.77/lb. on May 17. From May 1 to May 17, barrels increased by 9¢ and blocks fell by 13¢, narrowing the spread between blocks and barrels to just one cent. On May 20th barrels fell 0.5¢ to $1.7550/lb. and blocks held at $1.77/lb. CME butter was $1.7875/lb. as of April 18; started May at $1.69/lb., fell to a low of $1.5875/lb. on May 14, but increased to $1.615 on May 17, only to decline by 2¢ on May 20, to $1.595/lb. 

Dry whey and nonfat dry milk prices have held fairly steady with dry whey trading in the range of 56¢/lb. to 60.5¢/lb.; and nonfat dry milk $1.65-$1.72/lb./lb. 

The level of product production, stocks and export potential are all factors influencing cheese and butter prices. Compared to a year ago, cheddar cheese production for the month of March was 2.6% higher. However, total cheese production was slightly lower at 0.2%.

March butter production was 4.2% higher, the largest March production on record. Cheese stocks have been building. March 31 stocks of American cheese grew by 3% from February and were 4% higher than a year ago. March 31 total cheese stocks also grew 3% from February and were 5% higher than a year ago. Cheddar barrels have been in greater supply in relation to market demand than have cheddar blocks.

But, the recent narrowing of the price spread may indicate this has changed.

Warmer weather usually increases outdoor grilling which increases barrel cheese sales via of processed cheese. March 31 butter stocks grew by 34% from February and were 22% higher than a year ago.

Exports of cheese, butter, whey protein concentrates and lactose were well above year-ago levels for January through March period, giving strength to prices. Compared to a year ago increases, were: cheese (8%); butter )20%); whey protein concentrate (24%); and lactose (25%).

Nonfat dry milk/skim milk powder exports were 10% lower, with dry whey 8% lower, but expected to show increases by summer. Exports are expected to stay near or above year-ago levels at least until late fall. World milk supply for exports of products has been rather tight due high feed prices and/or unfavorable weather in New Zealand, Australia, the EU-27 countries and Argentina. However, rains have returned to New Zealand, giving optimism to better pastures and improved milk production at the start of their next seasonal production later this summer and early fall.

Feed prices are also expected to be lower giving rise to milk production in coming months in the EU-27 countries. In recent weeks prices on the Global Dairy Trade Auction showed strength. But, on the May 15 auction, average prices were lower for most commodities, especially for September, October and November deliveries. Evidently, international buyers anticipate adequate world supplies with improved world milk production by fall. Some feel that these lower world prices may lower the projected growth in U.S. exports for later this year. Currently world prices for butter, nonfat dry milk/skim milk powder and cheese are all well above U.S. prices making U.S. products competitive on the world market.