With milk production increasing relatively strong for both August and September and softness in both U.S. dairy sales and dairy exports dairy product prices have weakened which means lower farm milk prices. USDA estimated August milk production 2.1% higher than a year ago with some slow down for September production, up 1.7%. The September increase was due to 1.0% more milk cows than a year ago but just 0.7% more milk per cow. While cheese and butter sales have been favorable fluid milk (beverage milk) sales have been about 1.6% lower than a year ago. Nonfat dry milk/skim milk powder exports for the period of January through July were 36% higher than a year ago, but August exports were up just 1%. For this same period cheese exports were 41% higher than a year ago, but were 10% lower in August. Butter exports which were running well above year ago levels through June, up 57% from a year ago, dropped 36% below a year ago in July and 6% below in August.

On the CME, 40-pound cheddar blocks which were above $2 per pound from early June to mid-August were $1.72 as of October 19th. CME cheddar barrels which were also above $2 per pound from early June to mid-August were also $1.72 per pound as of October 19th. CME butter which was over $2 per pound from early January through early September was $1.86 as of October 19th. West nonfat dry milk was running above $1.60 per pound from May to the end of July and is now trading in the $1.42 to $1.495 range. Dry whey prices have been the exception. With continued strong exports West dry whey continue to trade in the $0.61 to $0.6375 per pound range adding support to Class III prices.

Class III milk set new record highs for July and August at $21.39 and $21.67 respectively. The Class III price declined to $19.07 for September and will be near $17.90 for October. Class IV milk was $20.33 for July, $21.14 for August, $19.53 for September and will be near $18.30 for October.

Farm milk prices for the remainder of the year and into 2012 will be impacted by the level of milk production. The relatively strong increases in milk production continue to be driven by increases in the West and Southwest. Compared to a year ago, September milk production was up 4.7% for Arizona, 0.6% for California, 6.3% for Colorado, 2.9% for Idaho, 4.4% for New Mexico, 10.1% for Texas and 1.8% for Washington. California's increased milk production was considerably lower than its August increase of 2.9%, the result of 1.4% more cows but 0.8% less milk per cow. In the Upper Midwest, milk production was down 0.7% for Minnesota and just 1.8% and 1.5% higher respectively for Wisconsin and Iowa. In the Northeast, milk production was up slightly in New York, 0.1% and down 1.5% for Pennsylvania. In the Southeast, Florida's production was up 11.3%.

Class III futures are well below $17 for the first half of 2012 with some improvement after that but still below $17 for the last half of 2012 through September of 2013. Hopefully prices will turn out better than this. On the positive side for higher prices is cheese production. Cheddar cheese production for the month of August was 2.4% lower than a year ago and for the year-to-date 2.9% lower. Total cheese production was below a year ago for both July and August and up just 1.9% year-to-date. August 31st American cheese stocks were just 1.3% higher than a year ago and total cheese stocks even with a year ago. If cheese sales can continue to show some growth, along with anticipated favorable dry whey prices this would add support to Class III prices.

A growth in milk production well under 2% would help to support higher milk prices. USDA estimates milk production to end up 1.6% higher for 2011 with another 1.3% increase in 2012. If Class III prices do drop well below $17 this winter, with high feed prices increased herd culling, less herd expansions and increased exiting of dairy producers can be anticipated. This would slow increases in milk production and support higher milk prices. The increase in cow numbers, which increased month-to-month beginning October of last year through August of this year may have already stopped. The estimated 9.209 million head for September was the same as August. High feed prices will also dampen increases in milk per cow. Unless dairy exports decline significantly, and this is not anticipated, there is a good probability milk prices could strengthen and be higher than what Class III futures are now showing by the second and third quarters of 2012. But, the $20 Class III prices experienced this year are not likely in 2012.

Bob Cropp

University of Wisconsin-Madison

TOP