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Fewer cows, less production drive higher milk prices

Dairy Notes: The all-milk price for 2019 is currently forecast at $18 per cwt.

June 24, 2019

5 Min Read
Cows graze in pasture
DAIRY PERKING UP: Things are looking up as fewer cows and less production are driving higher prices through the end of the year and into next year.

By Gary Latta

It now appears as if the positive dairy price forecasts promulgated by so many U.S. economists are coming true. 

Fewer cows and less milk production are bringing the domestic and global marketplace into better balance with demand. As a result, market prices have been steadily improving. Northeast Class I prices have climbed $1.77 per cwt and Class III has risen $2.42 per cwt since January. 

At the time of this writing in mid-June, Chicago Mercantile Exchange block cheese prices have risen to $1.80 per pound, up from $1.40 per pound in January. Barrel cheese has also been climbing and is currently near $1.70 per pound.

Butter prices have been steady but are now showing signs of improvement, approaching $2.40 per pound this week. As summer heats up and ice cream season takes off, look for butter prices to go higher.

Nonfat dry milk prices, which have also been quite steady, are also showing signs of improvement and are near $1.05 per pound. Dry whey prices, though, have been lower and continue to show signs of falling. The loss of whey exports to China has taken a toll on U.S. prices. Some of this loss has to do with Chinese trade retaliation, but much of it has to do with the outbreak of swine fever in China. In recent years, China imported a lot of U.S. whey to be used in swine feed. The swine fever outbreak has taken a toll on the Chinese pork industry and reports are that large quantities of beef, and even some dairy cows, are now being used to offset this.

Most industry observers and USDA are forecasting higher milk prices as we progress through the year. Class III prices have climbed from $13.89 in February to $16.38 in May. Some forecasters are predicting the Class III price will rise to over $17 soon and may approach $18 by the end of the year. 

Exports, along with continued reductions in supply growth, will be key to just how high dairy prices rise.    

Milk-per-cow estimates were lowered due to the expected effects of higher feed prices on output per cow. Milk production for the year was lowered 0.5 billion pounds.

USDA reduced its cheese price expectations by 1 cent in its May report but will likely reverse that since both barrels and blocks have been climbing quite rapidly the past few weeks. Whey prices for 2019 were reduced a very small amount, but butter was raised by $0.035 to $2.325 per pound, and nonfat dry milk was raised $0.01 to $1.015 per pound.

USDA revised its Class III forecast for the year by $0.15 to $15.90 per cwt. Again, if cheese prices hold or continue upward, this estimate will likely be revised upward. Higher butter and nonfat dry milk estimates have raised USDA’s forecast for Class IV price to $16.40 per cwt. The all-milk price for 2019 is forecast at $18 per cwt. This number, too, will be revised higher if current cheese prices hold.   

Less milk production

World surplus milk volumes have come into better balance. Major world dairy players like New Zealand and Australia are experiencing bad weather resulting in less milk production. The EU has experienced similar weather conditions, which many believe will affect its feed situation and limit milk production. 

Here in the U.S. we have seen a notable contraction in the size of the national dairy herd. Production per cow, though, continues to improve and set new records every month.

Milk production for May was down 0.1% from the previous year in the top 24 states. This is well below what we have seen over the past few years. May milk production among key Northeast states was mixed. New York was up 1% and Vermont milk production was unchanged from a year ago, but Pennsylvania was down 7% and Ohio was down 4.4%.

Other key states also saw mixed results for May. Arizona milk production is down 4.3%, California is up 1.3%, Idaho is up 1.4% and Wisconsin is down 0.4%.

Weather, exports and feed prices will play key roles in determining milk volume growth as the year progresses. Concerns over feed prices and availability have been in the news lately as persistent wet weather has affected planting schedules.   

Good news on trade

One piece of good news from Washington, D.C., is that recent negotiations with Mexico should help cheese and nonfat dry milk exports to that country.

Canada’s Prime Minister Justin Trudeau recently traveled to Washington to help ratify the U.S.-Mexico-Canada Agreement (USMCA), also known as “the new NAFTA.” USMCA would provide duty-free access to Canada and Mexico for most U.S. food and agriculture products, like NAFTA does. Some barriers with respect to dairy product exports into Canada would be removed. Both Canada and Mexico have indicated they are ready to move forward with the USMCA deal but getting both Republicans and Democrats on board in Congress has been a challenge.

Higher prices for 2020

For 2020, USDA is continuing its forecast of reduced cow numbers and lower output per cow because of higher feed prices and herd contraction.  

USDA estimates that dairy exports will be stronger in 2020. Overall, the agency expects most dairy product prices to move higher. Class III prices for next year are estimated to be near $16.65 per cwt. Higher forecasts for butter raised USDA’s estimate for Class IV by another 5 cents to $16.85 per cwt. The all-milk forecast for 2020 is currently $18.90 per cwt.

Many observers believe USDA’s estimates are too low and conservative. Some university economists are now talking about $17 to $18 per cwt for Class III in late 2019. USDA has Class III estimated at $16.45 to $16.60 per cwt, which could be too low based on what cheese and other prices are doing now.           

Dairy Margin Coverage enrollment

Enrollment in the USDA’s new Dairy Margin Coverage program has begun. Dairy producers should visit their local Farm Service Agency to sign up.

The new DMC program is a much-improved tool that all dairy producers should look at and participate in. There are several educational programs online that offer good instruction. Some universities and the USDA have online decision-making tools that will help dairy farmers with all the available options. 

Latta is a political and economic consultant for Northeast Dairy Foods Association Inc.

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