The December Class III milk price averaged $13.85, which put the average milk price for 2018 at $14.60 — the lowest average price in the past four years, according to USDA. The milk price for the year peaked in September at $16.09, despite a lower growth in milk production. It was up just 0.7% in October and 0.8% in November.

The decline in milk prices at the end of the year was not expected. Strong holiday sales of butter and cheese normally push prices higher. Sales in 2018 appear to be up but only modestly. Fluid (beverage) milk sales continued to decline, being 2.2% lower from January through October. December Chicago Mercantile Exchange butter and cheese prices will average lower than November prices. Butter is currently at $2.22 per pound. Barrel cheese is $1.32 per pound, and 40-pound blocks are $1.41 per pound. Nonfat dry milk is 93 cents per pound, and dry whey is 47 cents per pound.

Tariffs taking toll
U.S. dairy exports, which had been running above year-ago levels all year, were virtually flat in October, undermined by a continued loss of sales to China since implementation of retaliatory tariffs. According to the U.S. Dairy Export Council, combined shipments of milk powder, whey, lactose, cheese and butterfat to China were down 47% in October compared to the year before. Exports elsewhere were up 14%, with large gains to Southeast Asia and Mexico. October exports of nonfat dry milk/skim milk powder were up 37% to Mexico and 39% to Southeast Asia, making total NDM/SMP exports 19% higher than a year ago. The U.S. exported 82% of its October NDM/SMP production, the main factor for strengthening NDM prices. October whey exports were down 19% from a year ago, due mostly to China, the largest market, being down 51%.

The loss of whey exports is a major factor in reducing the price of dry whey from 58 cents per pound in mid-October to an average of about 43 cents per pound for November and December, and reducing the Class III price by nearly 90 cents. Despite the retaliatory tariffs placed by Mexico on U.S. cheese, October exports of cheese to Mexico were 31% higher than a year ago, offsetting losses to China, Japan and Australia and keeping total cheese exports the same as a year ago. October butterfat exports remained strong, being 75% higher than a year ago. In total, October exports were equivalent to 15.3% of U.S. milk production on a total milk solids basis, making year-to-date equal to 16.3% of milk production, according to USDA.

Relatively high stock levels are also responsible for lower dairy product prices and milk prices. Oct. 31 butter stocks were 5.9% higher than a year ago, but just 1.1% higher than two years ago. American cheese stocks were 9.9% higher than a year ago and 10.6% higher than two years ago. Total cheese stocks were 8.2% higher than a year ago and 12.3% higher than two years ago. While dry whey stocks were 21.1% lower than a year ago, they were 21.7% higher than two years ago. Nonfat dry milk stocks were 20.2% lower than a year ago, but 12.2% higher than two years ago, according to USDA.

Milk prices for 2019 will hinge heavily on milk production and dairy exports. Forecast milk production, domestic sales and dairy exports point to improved milk prices in 2019, but how much improvement? The current slowdown in milk production is encouraging. Milk cow numbers have been declining since June, with November numbers down 38,000 head from 2017. According to USDA, cow numbers are likely to continue to decline into 2019. The increase in milk per cow has slowed to 1%.

Fewer cows
USDA’s December forecast has milk production for 2019 increasing 1.3% from 20,000 fewer milk cows producing 1.5% more milk per cow. This level of increased milk production normally would be positive for milk prices. But milk production could even turn out lower. Milk cow numbers could fall by more than this. A wet spring and fall reduced silage and forage quality particularly in the Northeast and Midwest, which could reduce the increase in milk per cow.

It looks like growth in the economy may slow some in 2019, but still be conducive to increased butter and cheese sales. But dairy exports are a major factor that will determine how much milk prices will improve. An anticipated slower growth in world milk production is positive for exports. However, unless the trade dispute with China and Mexico ends, dairy exports will likely fall below 2018 levels and dampen the improvement in milk prices. Some are forecasting a Class III price below $15 for the first quarter of 2019, in the low $15s the second quarter, in the mid-$15s the third quarter and in the low $16s during the fourth quarter, for an average of no more than $1 higher than the forecast $14.60 average for 2018.

But according to USDA, there is a possibility that prices could be better than this, with Class III reaching the high $16s or low $17s by the fourth quarter. Let’s hope so, because dairy producers need more than just a $1 improvement in price during 2019.