By Bob Cropp, Professor Emeritus
University of Wisconsin Cooperative Extension
University of Wisconsin-Madison
Dairy product prices have been declining which means lower milk prices for December and for the first quarter of next year. On the CME, butter averaged $2.8779 per pound for November, started December at $2.90, but has fallen to $2.06. The 40-pound cheddar cheese price was $1.71 per pound back on November 11th and averaged $1.6176 for the month. The 40-pound block price started December at $1.56 per pound and has fallen to $1.44. The cheddar barrel price was $1.65 per pound back on November 6th and averaged $1.53 for the month. The barrel price was $1.515 per pound the beginning of December and has fallen to $1.45. Nonfat dry milk averaged $0.8149 per pound for November and has fallen to $0.765. Dry whey has shown a slight increase and is $0.23 per pound.
Hopefully the cheese prices have bottomed and perhaps show a little strength over the next month or two, but butter prices are likely to decline some more and nonfat dry milk and dry whey prices may hold or show some strength. But, with these lower dairy product prices the December Class III price will be about $14.50 compared to $15.31 in November. The Class IV price will be about $15.79 compared to $16.48 in November. But, unless prices do rally, which is not likely over the next couple of months we could see the Class III price in the low $13's first quarter of next year and the Class IV price below $13.00.
What is driving lower dairy product prices and milk prices? While the relative increase in milk production this year through November is just 1.2% higher than last year that is still a lot of milk considering last year had an increase of 2.3%. However, the relative increase has slowed considerably with increases of 0.5% for 0.5% for September, 0.3% for October and 0.6% for November. Milk production for the year will be about 1.1% higher than last year.
USDA's milk production report for November milk had cow numbers unchanged from October, but still 0.3% higher than a year ago. The increase in milk per cow remained well below trend at just 0.2%. The relative regional change in milk production continued with declining or slow increases in the West and good increases in the Northeast and Midwest. Eight of the 23 reporting states showed a decrease in milk production for last year with all accept one, Virginia being in the West. California continues to experience the biggest relative decrease, 4.4% and also in absolute terms, 149 million pounds. While cow numbers were down 4,000 head milk per cow being 4.2% lower was the main reason for the decrease. The biggest relative increase in milk production was South Dakota at 13.1% followed by Wisconsin at 4.3%. For other Midwest states, Iowa had an increase of 1.3% and Minnesota 2.4%. But, the combined increase of South Dakota, Wisconsin, Iowa and Minnesota of 142 million pounds did not offset the big decrease in California. But, with increases in the Northeast states like New York at 3.3% and Michigan at 6.4% and other states total milk production was 0.6% higher.
Good cheese and butter sales have held prices to early December. But, orders for strong holiday sales have been filled so orders for additional product is now much lower. With California's milk production lower, and being the number one butter producer, U.S. butter production for October was actually 1.7% lower than a year ago and 1.4% lower year to date. But, October butter exports were 57% lower than a year ago and 69% lower year to date. So October 31st butter stocks were actually 21% higher than a year ago. October American cheese production was 0.7% lower than a year ago, but 2.6% higher year to date with total cheese production 1.5% higher than a year ago and 2.4% higher year to date. October cheese exports were 10% lower than a year ago and 15% lower year to date. October 31st American cheese stocks were 11.6% higher than a year ago and total cheese stocks were 15.4% higher. Both the price of butter and cheese has been well above world prices attracting more imports. But, low nonfat dry milk prices have kept U.S. competitive on the world market and exports actually increased in October over a year ago by 29% with year to date exports unchanged from a year ago. October nonfat dry milk production was 11.9% lower than a year ago, and while October 31st stocks were 1.5% lower, stocks were still a record for this date. October exports of dry whey were 34% lower than a year ago and October 31st stocks were 4.2% higher.
While feed costs this winter will be a little lower than last year low milk prices at least for the first half of the year will squeeze returns over feed costs. As a result, cow slaughter will be higher than a year ago and increases in milk per cow reduced. So milk production may show little or no increase over a year ago for the first half of next year. Sales of butter and cheese should continue to show growth. With milk prices also depressed in major exporting countries world milk production is likely to increase less than in 2015, and as a result slowly reduce the world buildup of stocks. So world prices ought to improve as we move through the year. In fact recent trading on the Global Dairy Trade has already shown some strengthening of prices. With lower U.S. prices and higher world prices U.S. dairy exports should improve by the second half of the year. With slower growth in U.S. milk production and improved exports milk prices will show recovery. The Class III price could well be in the $15's by the third quarter and the $16's in the fourth quarter with peaking in the low $17's a possibility. Current Class III futures have weaken a lot with Class III below $14 January and February, don't reach the $15's until June and $16's until August and peaks around $16.30 in October.
1.4.2016