DairyBiz - Dairy Situation and Outlook September 1999

FEBRUARY 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

January 22, 2000
Milk prices ended the 1999-year at levels about $7 per hundredweight lower than the year before and the lowest prices since 1978. Why? Commercial disappearance of milk and dairy products has been very good, up 2.4% from January through October, compared to a year earlier. But, milk production was also excellent. Preliminary estimates are that U.S. milk production for 1999 was 162.7 billion pounds, up 3.4% from the 157.4 billion pounds produced in 1998. This strong growth in production occurred primarily in the western U.S. For example, California produced 30.459 billion pounds, an increase of 10.3%. Idaho produced 6.433 billion pounds, an increase of 11.6%. These increases are much stronger than what was experienced in the Upper Midwest. Wisconsin produced 23.082 billion pounds, an increase of just 1.1%. California produced 32% more milk than did Wisconsin.

Excellent weather, cheap feed and relatively good milk prices for 1998 and most of 1999 have encouraged more milk production. Milk cow numbers, which normally decline 0.5% to 1.0% each year, increased in 1999. December milk cow numbers were 0.7% higher than the year before. Four rapidly growing milk producing states--Arizona, California, Idaho and New Mexico had 98,000 more milk cows than a year ago, an increase of 4.7%. But 13 of the 20 reporting states had fewer milk cows than a year ago. The cheap feed and excellent weather resulted in milk per cow for December being up 3.2% from a year earlier. Some states, like California and Idaho, experienced excellent increases in milk per cow, 7.8% and 4.2% respectively. Only 5 of the 20 reporting states had lower milk production per cow.

December milk production, compared to a year before, show milk production up as follows: California 11.1%, Idaho 14.6%, New Mexico 8.6%, and Arizona 4.2%. The drought in the Northeast has not lowered milk cow numbers much nor resulted in decreased milk production. New York had 0.3% fewer milk cows, but 2.9% more milk per cow and netting 2.5% more milk. Pennsylvania had the same number of cows that produced 3.1% more milk. Wisconsin has been experiencing some decline in cow numbers, down 0.4%, but for some reason, in recent months milk per cow has not increased. For December, milk per cow was down 0.4%. So for December, Wisconsin experienced 0.8% lower milk production. The neighboring state of Minnesota also had less cows, 0.9%, but 1.7% more milk per cow and netted an increase in milk production of 0.7%. Only the following 7 of the 20 reporting states had lower December milk production: Florida -1.0%, Illinois -2.8%, Indiana -1.6%, Iowa -7.2%, Kentucky -0.7%, Missouri -1.5% and Wisconsin -0.8%.

Excellent weather, cheap feed and relatively good milk prices for 1998 and most of 1999 have encouraged more milk production.

While lower milk prices will likely slow increases in milk production later in the year as cow numbers decrease rather than increase, some additional dairy farmers exit and possible expansion plans are delayed. Yet, if weather cooperates and grain and forage crops are good in 2000 and summer weather does not place a lot of heat stress on milk cows, milk production will continue to increase, probably not another 3.4% as in 1999, but near 2% is possible. The milk feed-price ratio has deteriorated being 3.42 in December, down from the 3.84 in November and 4.32 a year ago. But a ratio above 3.0 is still favorable to increases in milk production. Milk prices will be under pressure for the first half of the year, and unless weather turns unfavorable, prices will average below year ago level for the second half.

More milk has meant more production of dairy products. The latest production report was for October, where compared to a year ago, cheddar cheese production was up 14%, all cheese production up 5% and butter production up 5%. But indications are that production of both cheese and butter continue well above year ago levels. As of December 31st, stocks of all cheese stood at 610.736 million pounds, 18.1% higher than a year ago, and butter stocks stood at 25.965 million pounds, just 0.2% higher. Strong production and higher stocks have pushed CME cheddar cheese prices near support for the past three weeks and butter has been bouncing around below or above $0.90 per pound and is expected to decline to the low to mid- $0.80s. This means that the January class III price (the replacement for the BFP) could be below $10.00. My estimate is $9.80. The CME class III December futures settled at $10.07 on Jan 21st. Until some of this stock is worked off and milk production decreases seasonally, there is not much to rally prices. The class III price is likely to stay below $11.00 through April or perhaps even May. It may peak in October at or below $13.00. The CME class III futures on January 21st were the highest for September at $12.85. Futures do not offer a lot of opportunity at this time to lock in relatively good milk prices. Buying PUT options may be considered to protect against even lower milk prices.