Cropp: June Dairy Situation and Outlook

Bob Cropp, professor emeritus with the University of Wisconsin-Madison, backed off previous projections of $20/cwt. Class III milk prices this summer, but said there's still the possibility Class III prices could be in the high $19s/cwt. yet this year.

“Current market conditions indicate the Class III price could be near above $19/cwt., August through October or November,” Cropp wrote in his monthly Dairy Situation and Outlook. “However, current Class III futures are $18.50/cwt. or lower during this period.”

“Milk prices should start to increase again in July and peak in October or November,” Cropp said. “The spring flush is done and milk production declines seasonally during the summer months. By late summer, schools will open, increasing fluid milk sales, and dairy processors and buyers begin to position cheese and butter for the strong seasonal sales period of Thanksgiving through Christmas.”

Looking beyond 2013 into 2014, there's a lot of uncertainty,” he said. A major unknown is how this year’s crops turn out, and resulting feed cost this coming winter. 

“Earlier I had projected the possibility that the Class III price could reach $20/cwt. this summer,” he said. “But, milk production is running higher than anticipated, resulting in more dairy product production and dairy stocks. I still feel there still is a very good probability that the Class III could reach at least the high $19s/cwt., if the increase in milk production does not run much more than 1% above a year ago, and domestic sales and exports turn out better.”

Cropp summarized the difference between 2012, and described trends in the first half of 2013.

“Last year the October Class III price was $21.02/cwt., but drought was increasing feed prices, and milk production was slowing, he explained. “This year milk prices were at their low in March, with Class III at $16.93/cwt. The Class III price improved to $18.52/cwt. in May. But, for June the Class III price will fall back some to about $18.05/cwt. Prices are much improved over a year ago, when the May Class III price was $15.23/cwt. and June $15.63/cwt. The lower June Class III price may be attributed to a spring flush in milk production, resulting in relatively high dairy product production and increasing stocks of dairy products.”

Any price increase, of course, will depend on the level of milk production, domestic sales and exports. Higher milk prices and lower feed costs have improved margins for dairy producers, which could stimulate higher milk production. 

USDA release of May’s milk production showed milk production is increasing: U.S. production was 0.8% higher than a year ago. This is also a lot of milk, since May production a year ago was up almost 2%. Milk production was rather flat for the first four months of this year. However, that was still a lot of milk, since last year production during this period was 4% higher than the year before. 

Western production was lower in May compared to a year ago, with Arizona down 1.9%; California down 0.5%; New Mexico down 1.1%; and Texas down 0.8%. Production was slightly higher in Idaho, up 0.3%. And, production was running higher in the Northeast and Upper Midwest: up 2.1% in New York; 1.7% in Ohio; 2.3% in Pennsylvania; and 2.5% in Michigan. Iowa’s production was up 2.9%; Minnesota, up 1.8%; and Wisconsin, up 1.2%.

Higher milk production added to dairy product output and supplies. While April butter production was slightly lower than a year ago (-0.3%), American cheese production was 2.4% higher, with cheddar up 4.4%, and total cheese production 3.2% higher. Nonfat dry milk production was 15.7% lower but skim milk powder production was 110.6% higher, reflecting export opportunities. 

Butter stocks as of April 30 increased 21.8% from March, and were 22.2% higher than a year ago. American cheese stocks increased 2.1% from March, and were 5.3% higher than a year ago. Total cheese stocks increased 1.3% from March and were 4.5% higher than a year ago.

Commercial disappearance of all dairy products has been running below a year ago, with January through March 0.6% lower. Butter and cheese sales have been higher, but fluid (beverage) milk sales were 4.2% lower.

The level of dairy product production and stocks has meant lower dairy product prices. Butter has been below the May average of $1.5796/lb. and, as of June 19 was $1.5075/lb. Cheddar barrel cheese averaged $1.7251/lb. for May and is now higher at $1.75/lb..The 40-pound block cheddar cheese have been below the May average $1.8052 per pound and is now $1.725. Western dry whey prices have held steady in the 56¢ to 61¢/lb. range, and the price of nonfat dry milk strengthened slightly to the range of $1.67-$1.72/lb.

The Consumer Confidence Index has improved, which could be positive for domestic sales. 

Also on the positive side for milk prices are dairy exports. April exports on a total-solids basis were equivalent to 15.7% of U.S. milk production, which was a record. This compares to 13.5% of U.S. milk production for all of 2013.

Compared to April a year ago, exports of nonfat dry milk/skim milk powder were up 40%, for a record volume for any given month. This drew down nonfat dry milk stocks 17% from March. Cheese exports were 6% higher, whey products 13% higher, and lactose 23% higher. But, after running higher for the first four months, butter exports was 29% lower. 

Exports should also remain a positive factor. March and April milk production by the five major dairy exporters – the European Union, U.S., New Zealand, Australia and Argentina – was 3.1% lower than a year ago. While recent rains have reduced the drought conditions and improved pastures for New Zealand, a lot of cows were culled during the drought, which will slow increases in their milk production during the start of their next production season later this summer and fall. Forecasts are for the combined total milk production for the five exporters to remain rather flat for the remainder of the year. 

U.S. dairy product prices are also favorable to world milk prices. These conditions should be positive for U.S. dairy exports for the remainder of the year.

Potential limiting factors to milk production are high beef prices, and the feed situation. Attractive beef prices have encouraged heavier culling of dairy cows, and there are reports of dairy replacements going into cattle feed lots,” Cropp said. “Unfortunately, USDA’s National Ag Statistics Service (NASS) will not be publishing the July 1 cattle inventory to verify this.”

The hay supply could remain tight, and prices high. The carryover of hay stocks will be low. May 1 U.S. hay stocks were 34% lower than the year before, and the lowest total for May 1 since statistics were first complied. May 1 hay stocks were 55.7% lower for Wisconsin and 45.6 % lower for Minnesota. Both states experienced major winterkill of their alfalfa. Also, wet weather has delayed corn and soybean planting in the Midwest, and the harvest of the first crop of hay. The delay in first cutting of hay could reduce the number of possible cuttings and total tonnage.