The good news is milk prices have bottomed out and are now improving, according to Bob Cropp, University of Wisconsin Extension dairy economist. The May Class III price hit the low for the year at $12.76 with June increasing to $13.22 and July at $15.35. Class III futures are in the $16s for the remainder of the year. But, it is uncertain if prices will hold at these levels.

"These higher prices are driven by surprisingly much higher dairy product prices," Cropp explains. "Higher prices have been surprising because milk production has been relatively strong, dairy stocks have been increasing and dairy exports remain week."

Strong sales

Regional milk production patterns remain the same as the past few months with stronger production in the Northeast and Midwest.

Butter stocks on May 31 were 22.5% higher than a year ago and 32.3% higher than the five-year average for this date. But, on the positive side, sales of butter and cheese have been strong, according to the USDA. While total cheese stocks are much higher, fresh cheese has been tighter. Also cheddar cheese production has been lower than a year ago with May production 2% lower. There are reports that some butter and cheese buyers report having difficulty finding product outside of contract commitments, Cropp notes.

Chicago Mercantile Exchange butter, which averaged $2.264 per pound in June, ranged from $2.25 to $2.35 per pound in July. CME cheese prices have shown even greater strength. The 40-pound blocks averaged $1.5005 per pound in June but ranged from $1.58 to $1.68 per pound in July. And barrels which averaged $1.5301 per pound in June ranged from $1.67 to $1.7750 per pound in July.

"Whether dairy product prices increase more in the months ahead will depend on continued strong sales and lower milk production than now forecasted," Cropp says. "It doesn’t now look like we can expect much improvement in exports to increase prices. USDA is still forecasting milk production this year to end up 1.8% higher than last year. I think the increase could end up closer to 1.6%. Much of the dairy country is currently experiencing some extreme temperatures which could reduce milk per cow, especially if these temperatures persist through August."

USDA’s milk production report for June milk production showed production staying relatively strong at 1.5% higher than a year ago. Milk cow numbers have been rather stable at 9.37 million head in April and May and increased just 1,000 head in June. June milk cows were just 5,000 head higher than a year ago. "Milk production is growing due to higher milk production per cow which was up 1.4% in June," Cropp says. "Milk production peaked in May and is now seasonally declining with June’s production 852 million pound lower than May."

Regional milk production patterns remain the same as the past few months with stronger production in the Northeast and Midwest and weaker but improved production in the West.

"So there is now much uncertainty whether milk prices will end up as dairy futures is now showing," he says. "But, I do believe Class III and Class IV staying at least in the $15s for the remainder of the year is very possible."

If so the Class III would average around $14.50 for the year compared to $15.80 last year and $22.34 in 2014. USDA is still forecasting prices lower than this with Class III in the $13.90 to $14.20 range.