DairyBiz - Dairy Situation and Outlook September 1999

JANUARY 2000

Dairy Situation and Outlook
by Bob Cropp Dairy Marketing and Policy Specialist
University of Wisconsin Cooperative Extension
University of Wisconsin-Madison
Supported by the University of Minnesota Extension

December 15, 1999
The November drop in the BFP to $9.79, the lowest price since August 1978, and at the $9.80 support price, has raised major concerns among dairy producers. The question is, how soon will prices recover? I wish I could say, you can expect a major price recovery within a month or two. But unfortunately, we can't expect major price increases for a while. The nation's milk production, and in turn the production of dairy products have been running well above year ago levels. Milk production thus far for the year (January through November) is up 3.4% from the same period a year ago. More milk cows, and excellent milk per cow due to relatively cheap feed and ideal weather have both contributed to this increase. While the sales of milk and dairy products have been good, sales are not able to accommodate this level of production increases. The latest sales data, January through September, show increases compared to a year ago of: 2.4% for all dairy products, 2.8% for butter, 6.9% for American cheese, 5.2% for other types of cheese, and 1.0% for beverage milk. But increases in the production of dairy products exceed these relatively good sales. Compared to a year ago, October dairy product production showed increases of: American Cheese 11.6%, total cheese 5.2%, butter 5.4%, and nonfat dry milk 35.4%. Year to date increases were: American cheese 8.6%, total cheese 5.9%, butter 8.5% and nonfat dry milk 20.6%. Since dairy product production exceeded sales, stocks of dairy products have increased. Increases in October 31st stocks compared to last year were: Natural American cheese 457 million pounds, an increase of 15.7%; Total cheese 622.7 million pounds, an increase of 19.1%, and 60 million pounds of butter, an increase of 93.5%.

Normally prices strengthen through October because of the forthcoming strong sales period of Thanksgiving through December. But these increases in dairy product production and stocks have pushed wholesale dairy product prices much lower than a year ago. On the CME 40 pound cheddar cheese blocks which were at $1.9725 per pound in mid-August dropped all the way to $1.12 in December, and surprisingly recovered some during the past few trading days to $1.22 per pound on December 14th. But price the price fell back 4 cents on December 15th to $1.19 per pound. With the November milk production report released on December 15th that shows continued expansion in milk production, cheese prices may fall back even further. CME Grade AA butter prices, which were at $1.325 per pound mid-August, are now at $0.905 per pound. A year ago, 40 pound cheddar blocks were around $1.90 per pound and butter at $1.42 per pound. These price differences explain why the November BFP was $9.79 compared to $16.84 a year ago.

As of January 1, 2000, federal order reform will replace the BFP with a Class III price for milk used for cheese. So December 1999 will be the last BFP. This new Class III price will be derived from component values for protein, butterfat and other nonfat dry milk solids. Earlier claims that this new Class III price will average $0.47 below the BFP appear to be unfounded. While some major differences exist for given months, the yearly difference may be $0.10 or less. If federal order reform had been implemented on October 1st, the November Class III price would have been $10.57 rather than the announced $9.79 BFP. The announced December BFP should be between $9.85 to $10.00. We can expect the new Class III price to stay in the low $10.00 range early in 2000 and not going above $11.00 until perhaps June.

Normally prices strengthen through October because of the forthcoming strong sales period of Thanksgiving through December. But these increases in dairy product production and stocks have pushed wholesale dairy product prices much lower than a year ago.

The milk production report for November seems to confirm this outlook. For the 20 reporting states, November milk production was up 4.4% from a year ago -- the strongest increase yet this year. Milk cow numbers were 0.8% higher and milk per cow was up 3.6%. Major increases occurred in California, up 12.1%; Idaho, up 14.9%; New Mexico, up 11.7%; and Arizona, up 7.2%. Weather has been ideal for milk production in these states. Milk per cow was up 8.4% in California, 4.4% in Idaho, 4.8% in Arizona, and 3.7% in New Mexico. Dairy herd expansion also continues with milk cow numbers up 3.3% in California, 10.0% in Idaho, 7.8% in New Mexico and 2.3% in Arizona. Despite a drought and tighter hay supplies, milk production is up as well in the Northeast. Production was up 2.7% in New York, 2.6% in Pennsylvania, and 2.5% in Ohio. While cow numbers were down 0.3% in both New York and Pennsylvania, milk per cow was strong, up 3.0% and 2.9% respectively. This is a common occurrence following a drought because hay quality is often better and dairyman feed more carefully. But in the Upper Midwest milk production is not increasing. While milk cow numbers were down just 0.3% in Wisconsin, milk per cow was the same as last year. So there was no increase in Wisconsin's milk production. While milk cow numbers were unchanged from a year ago in Minnesota, just 1.9% more milk per cow netted 1.9% more total milk production. States showing decreases in milk production were Florida, 1.3%; Missouri, 2.7%, Illinois, 5.3%; Indiana, 3.4% and Iowa, 2.2%. As we move into the winter months, and with these lower milk prices, we can expect milk cow numbers to decline some. But with many recent dairy expansions, and several in the completion stage, milk production will remain fairly strong for the first 6 months of 2000. Only unfavorable weather for crops and milk per cow will rally milk prices above normal seasonal increases during the second half of the year.