Dairy Situation and Outlook May 19, 2014

Dairy Situation and Outlook May 19, 2014

USDA’s milk production report for the month of April shows production continuing to increase above year ago levels at a relatively slow pace of 1%. Milk cow numbers are also increasing at a slow pace. Milk cow numbers increased by 10,000 head from last month and by just 23,000 head since numbers began increasing last December. Forage quality and the effect of a very cold winter appear to continue to negatively impact milk production in the Upper Midwest. Compared to April a year ago milk production was down 1% in Iowa, 2.7% in Minnesota and 0.3% in Wisconsin. The West experienced higher April production than a year ago with increases of 1.5% for California, 1.1% for Idaho, 3.2% for Arizona and 8.7% for Texas. But, New Mexico’s production was down 1.4%. In the Northeast small increase were experienced by New York up 0.3% and Pennsylvania up 0.1% with Michigan up 2.6%. But, Ohio’s production was down 3.4%. Other states with relatively strong April production increases were Colorado up 8.5%, Kansas up 4.9% and South Dakota up 4.9%.

Farm milk prices remain at record levels due to milk production increasing at a rather slow pace thus far this year, domestic dairy product sales holding up and continued record dairy exports .The April Class III price set a new record at $24.31, $6.71 higher than a year ago, and the April Class IV price was $23.34, $5.24 higher than a year ago. The April U.S. All Milk Price set a new record at $25.50, $6.00 higher than a year ago. Dairy product prices have soften some since then which means prices will be a little lower in May with both the Class III price and Class IV prices near $22.55.

Cheese prices have been above $2 per pound all year up until May 13th. On the CME cheddar barrels were $2.2575 per pound mid-April and are now $1.96. The 40-pound cheddar blocks were $2.28 per pound mid-April and are now $1.9975. Nonfat dry milk prices were well above $2 per pound all year through April and are now $1.87. But, dry whey prices remain strong at $0.67 per pound. Butter which was $1.895 per pound on April 24th is now surprisingly at $2.16.

Dairy exports through March continue to set records. Compared to March a year ago increases in exports were as follows: butter and milkfat 100%, cheese 37%, nonfat dry milk 31%, dry whey 32%, whey protein concentrate 28%, and lactose 25%. On a total solids basis dairy product exports were equivalent to 17.7% of U.S. milk production. But, good recovery in milk production in Oceania and the EU-18 is putting some downward pressure on world milk prices. Since the beginning of the year Europe butter has declined from $2.56 per pound to $2.15, skim milk powder from $2.06 per pound to $1.87, and dry whey from $0.64 per pound to $0.62. Oceania cheddar cheese has declined from $2.22 per pound to $2.09. At these lower prices U.S. prices are not as competitive on the world market and world buyer interest in U.S. products may soften which will put some downward pressure on U.S. prices. But, world dairy stocks will remain fairly tight until at least the second half of the year. There is some uncertainty whether China will continue its aggressive imports and what impact the Ukrainian situation may have on dairy trade. Nevertheless, U.S. dairy exports could still set another record for the year.

Good domestic sales and strong exports have reduced dairy stocks. March 31st stocks compared to a year ago were: Butter down 30%, American cheese down 8%, total cheese down 9%, dry whey down 21% and nonfat dry milk down 2%.

We can expect the growth in milk production to pick up as we move through the year. Average returns over feed costs for April were $13.85 per 100 pounds of milk compared to $6.09 a year ago (calculated with 2014 Farm Bill margin protection formula). These favorable margins encourage feeding cows for higher milk production. We will likely see a slow increase in the number of milk cows as we move through the year both from adding cows and keeping some cows that normally would be culled. Thus far this year the number of slaughtered dairy cows is more than 10% lower than a year ago. Also, as new and better quality forages become available we can expect milk per cow to improve, particularly in the Midwest states.

With expected stronger growth in milk production and some softening of dairy exports milk prices will slowly decline but remain at a good level historically. The Class III price could fall below $20 by August or September and be in the mid $18’s by December. If this holds true, the average Class III price for the year will be near $21 compared to $17.99 for 2013 and the U.S. All Milk Price will average near $23 compared to $20.05 for 2013.

By Bob Cropp, Professor Emeritus
University of Wisconsin Cooperative Extension
University of Wisconsin-Madison

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