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Milk prices expected to rise through end of year

Holstein cows in barn
BETTER MILK PRICES: Last year, the May Class III dropped to a low of $12.76, compared to about $15.60 this year.
Dairy Outlook: The May Class III price could end up $2.75 higher than a year ago.

Milk prices should continue to improve from here out, according to Bob Cropp, a University of Wisconsin Extension dairy economist.

"Domestic sales appear to be favorable for butter and cheese," Cropps says. "Dairy exports are expected to continue above year-ago levels. As world supply and demand tightens, world dairy product prices will increase, making U.S. dairy product prices more competitive."

Milk production among major dairy exporters has been below year-ago levels for the European Union, New Zealand, Australia and Argentina. The U.S. has been the exception with higher milk production. However, milk production by the other four exporters, particularly the EU and New Zealand, is expected to start running above year-ago levels during the second half of the year. But stronger buying by China and others will help keep a tighter world supply-demand situation, Cropp says.

 The level of U.S. milk production will determine how much milk prices strengthen.

"With expected favorable domestic sales and higher dairy exports, we can expect improvement in milk prices if the increase in milk production stays close to 2%. USDA is forecasting 2017 milk 2.1% higher than 2016. USDA estimates April milk production 2% higher than a year ago," Cropp explains. The number of milk cows has been increasing since October of last year and is now 0.7% higher than a year ago. Milk per cow was 1.3% higher than a year ago. Compared to April a year ago, milk production in the West and Southwest is up 3.8%.

Stronger futures prices
Class III futures have turned more optimistic about milk prices than at the beginning of May.

"Class III futures reach the low $16s by June and the low $17s August through November," Cropp says. "With continued good domestic sales and improved dairy exports, a Class III price in the higher $17s by October is very possible. Some price forecasters even see $18 as a possibility."

Weather will also be a factor as to where milk prices end up. Hot and humid summer weather can reduce the increase in milk production and depress milk components, lowering the yield of dairy products per 100 pounds of milk. Milk prices will respond to relatively small changes in milk production, domestic sales and dairy exports. But Cropp believes milk prices could average for the year $1.30 to more than $2 higher than last year.

April likely was the bottom for milk prices. The Class III price fell from $16.77 in January to $15.22 in April, and May should be near $15.60. Cheese and butter prices have responded to a slower growth in milk production and improved dairy exports. January milk production was 2.6% higher than the previous year, but March production was up just 1.7%. First-quarter dairy exports were up 14% by volume compared to a year ago, the best first quarter since 2014, Cropp says. While butterfat exports were 49% lower, cheese exports were 12% higher. With nonfat dry milk/skim milk powder exports 19% higher and total whey exports 27% higher, first-quarter exports on a total solids basis were equivalent to 14% of total milk production, compared to 12.6% a year ago. 

 Cheese and butter prices have strengthened since the first of May. On the CME, 40-pound cheddar blocks started the month at $1.48 per pound and are now $1.67. Cheddar barrels started the month at $1.42 and were as high as $1.54 mid-month, but are now $1.47. The spread between blocks and barrels has ranged from 6 cents per pound to as high as 20 cents, rather than the more normal spread of 3 to 4 cents. Butter started the month at $2.09 per pound, was as high as $2.43 and is now $2.38.  Dry whey prices softened some but still traded in the 45 to 52 cents per pound price range, Cropp explains.

"These higher product prices explain the higher May Class III price," he says. “If the Class III price ends up near $15.60, it will average about $2.50 higher during the January-to-May period than last year. Last year the May Class III dropped to a low of $12.76." 


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