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Robust milk production threatens price recoveryRobust milk production threatens price recovery

Dairy Outlook: U.S. milk production is 3.3% higher than a year ago.

Fran O'Leary

May 27, 2021

4 Min Read
Dairy cows at feeder
OPTIMISTIC FUTURES PRICES: Current Class III futures are rather optimistic. Class III is in the low $19s from July through October before dropping to the $18s for November and December. “It will take a combination of lower milk production, strong domestic sales of dairy products and continued strong exports for these prices to materialize,” economist Bob Cropp says.Fran O’Leary

Since their low in February, milk prices continue to climb higher. The February Class III price was $15.75 and increased to $17.67 in April, with May predicted to be around $18.90.

“The stronger Class III price is the result of cheese prices strengthening the end of April into May and higher dry whey prices at 64 cents per pound,” says Bob Cropp, University of Wisconsin-Madison Extension dairy economist. “A year ago, dry whey was 39 cents per pound. The higher dry whey price has added about $1.45 to the Class III price.”

The stronger Class IV price is the result of higher average butter and nonfat dry milk prices, Cropp says. While butter and nonfat dry milk prices are holding, cheese prices have taken a sharp downturn, which means a weaker Class III price in June. On the CME, the 40-pound cheddar block cheese price has fallen 23 cents per pound, from $1.81 in mid-May to $1.58. Cheddar barrels have fallen 15 cents per pound, from $1.78 in mid-May to $1.62 on May 26.

“The higher cheese prices in early May were driven by stronger demand,” Cropp says. “There were cheese purchases under the Farmers to Families Food Box program, which expires the end of May.”

COVID-19 easing

“With improvement in the COVID-19 situation, some schools have returned to classroom instruction and restaurants are more fully open, which has increased food service sales,” Cropp explains. “As we approach the grilling season, the demand for processed cheese increases.”

This partially explains why the spread between barrels and blocks has changed. Earlier, barrels were 20 cents or more per pound lower than blocks; now, barrels at times are higher than blocks, or just slightly lower. And cheese exports for the month of March were up some from a year ago as Mexico, the largest market, bought 11% more cheese — the highest cheese export volume to Mexico since June 2018.

“Dairy exports also were a very positive factor for higher dry whey, butter and nonfat dry milk prices,” Cropp says. Exports on a milk solids equivalent basis set a record in March and were equivalent to 18.6% of milk production. Exports of nonfat dry milk-skim milk powder and dry whey both set all-time highs. Compared to March 2020, exports of nonfat dry milk-skim milk powder were up 18.6%, dry whey was up 26.9% and butterfat was up 114.9%.

But cheese prices may be under pressure from relatively high cheese production and cheese stocks. Compared to a year ago, cheddar cheese production for March was up 7.8% and total cheese production rose 4.8%.

March 31 American cheese stocks and total cheese stocks were up 7.1% and 6.7% from a year ago, respectively. Also, these stock levels were higher than February stocks.

What’s ahead?

The forecast for milk prices remains cloudy and uncertain, according to Cropp. “Further opening of restaurants and a move to more in-classroom instruction this fall, as well as conventions, conferences and attendance at sports events returning to more normal, all support stronger milk and dairy product sales,” he says.

Dairy exports look positive as the world economy improves and major export markets like Mexico and China increase purchases, he notes. Currently U.S. prices for butter, nonfat dry milk-skim milk powder and cheese are very competitive with Oceania and Western Europe. But dry whey prices are above world prices.

However, milk production needs to slow down to support milk prices. USDA’s latest forecast has 2021 daily milk production up 2.4% from 2020, the result of an average of 82,000 more milk cows and 1.5% more milk per cow. But with considerably higher feed costs, the increase in milk production could slow by the second half of the year, with increased culling and smaller increases in milk per cow.

USDA’s milk production report for the month of April is not positive for milk prices. March milk production was revised to an increase of 1.9% from a year ago, with April’s production 3.3% higher. Milk cow numbers have been increasing since July of last year. Cow numbers increased another 16,000 from March to April. April cow numbers were 113,000 higher than a year ago for a 1.2% increase. Milk per cow for April was 2% higher than a year ago.

Several states had relatively high increases in April milk production over a year ago: South Dakota 13.4%, Indiana 11.4%, Texas 7.7%, Minnesota 6.9%, Colorado 6.0%, Kansas 5.4%, Wisconsin 4.6%, Michigan 4.5%, California 4.1% and New York 2.9%. Except for New York, which had no increase in cow numbers from a year ago, and California with 1,000 fewer cows, all other states added a lot of cows.

Current Class III futures are rather optimistic. Class III is in the low $19s from July through October before dropping to the $18s for November and December.

“It will take a combination of lower milk production, strong domestic sales of dairy products and continued strong exports for these prices to materialize,” Cropp says.

Current butter, cheese and dry whey prices put the Class III price in the $17s. USDA’s latest price forecast has the Class III price averaging just $16.85 for the year, compared to $18.16 last year.

About the Author(s)

Fran O'Leary

Wisconsin Agriculturist Editor

Even though Fran was born and raised on a farm in Illinois, she has spent most of her life in Wisconsin. She moved to the state when she was 18 years old and later graduated from the University of Wisconsin-Whitewater with a bachelor's degree in journalism.

Fran has 25 years of experience writing, editing and taking pictures. Before becoming editor of the Wisconsin Agriculturist in 2003, she worked at Johnson Hill Press in Fort Atkinson as a writer and editor of farm business publications and at the Janesville Gazette in Janesville as farm editor and feature writer. Later, she signed on as a public relations associate at Bader Rutter in Brookfield, and served as managing editor and farm editor at The Reporter, a daily newspaper in Fond du Lac.

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