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Less production, higher price expected for milk

Growth in dairy demand this year may not match the exuberant pace of recent years, due to some “ragged edges” in the nation's long, steady economic expansion and ample supplies that are expected to keep prices at relatively low levels.

Even so, says James Miller, economist with USDA's Economic Research Service, “dairy demand is projected to remain fairly good…most of the year, with demand for cheese, butter, and cream probably continuing to show the most strength.”

Speaking at the USDA's Agricultural Outlook Forum 2001, Miller said the past three years “may well have seen the strongest overall dairy demand in memory” as consumers “decided to pamper themselves in a variety of ways, significantly increasing spending for food.”

This showed up particularly in demand for cheese, butter, cream, and premium ice cream, as well as for high quality beef, more expensive pork cuts, and other foods.

Staple dairy products sold mostly at retail, such as fluid milk, saw “largely stagnant” demand, however.

And there was weakness in skim solids used in processed foods, Miller noted, due in part to “collapsing sales” of many non-fat and very low fat foods, increased food use of whey products, and substantial imports of concentrated milk proteins.

Commercial use of milkfat has grown almost 3 percent per year since 1997, with sales growth more than doubling population increases, despite retail dairy prices rising at an annual rate about 1 percentage point more than the Consumer Price Index.

Price recovery

“The dark side of surging demand is that its resulting strong milk prices generally unleash a rapid expansion in milk production,” Miller says. “Growth in output clearly overwhelmed demand during late 1999 and 2000. But, the crest of the production expansion has passed and milk prices may start to recover by the second half of 2001.”

Low concentrate feed prices continue to encourage heavier feeding and brisk gains in milk per cow, he notes. Milk-feed price ratios are expected to average about the same in 2001 as in 2000.

“The dairy forage situation is less favorable than for concentrates. Alfalfa hay production was lower in 2000 and moderate quality problems were common, at least for some cuttings. Exports also picked up last year, draining off some of the top quality hay.”

Alfalfa hay prices recently were well above year-earlier levels, Miller says, and “probably will remain so for the rest of 2001.” Corn silage production was also down in most dairy areas in 2000.”

Milk per cow rose a relatively modest 2 percent in 2000 over 1999 on a daily average basis. But, he points out, that comes on the heels of “extraordinary” growth in milk per cow in 1999. “Compared to the 5-year average, gains in 2000 were clearly above trend.”

After rising steadily during 1999 and the first half of 2000, milk cow numbers held steady through the summer and turned downward during the autumn, ending the year near where they began.

“Last year's relatively flat pattern resulted from a gradual slowing of expansion by financially strong farms and a gradual acceleration of the exit of weaker farms,” Miller says.

The rise in the number of farms going out of dairying “was more sluggish than predicted, but not surprising. Although many of these farms have poor long-run income prospects, they typically have relatively little debt and are therefore relatively unaffected by lender decisions.”

Although recent returns for dairying were low, Miller notes, the good returns in 1998-99 “left these families in a position to hang on a little longer and exits did not accelerate until late in 2000.”

Expansion of strong farms “shows no signs of slowing dramatically,” he says. “Demand for dairy replacements stays strong and replacement cow prices…are still above $1,300 despite a large herd of replacement heifers at the start of 2001. The lower returns, needed consolidation after recent rapid expansion, and forage problems will tend to slow, but not stop, expansions in 2001.”

While those exiting dairying this year “likely will be more numerous, this is not expected to result in rapid declines in milk cow numbers. Cull cow prices are projected to be the highest in a number of years, but probably will not be enough to divert many cows to slaughter, at least as long as replacement prices stay fairly firm.”

Milk production is projected to be little changed this year, Miller says. “If milk per cow can recover from its current weakness, output during 2001 may run near that of 2000.”

Milk prices are “likely to recover only slightly from last year's low.” For the year, the average price of all milk is expected to rise about 50 cents per hundredweight and the gap between the value of milk for butter/powder and for cheese “probably will stay wide.”

But, Miller says, 2001 is expected to “be a year when milk production slows and demand continues to expand, setting the stage for stronger prices in the years to come.”

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