Milk Prices May AVG. $7.00 Lower

Volume 139, No.31, Friday, January 23, 2015

The year 2014 will be remembered as record milk prices. The average Class III price was $22.34, $4.34 higher than 2013. The average Class IV price was $22.09, $3.04 higher than 2013, and the average US All Milk Price was $23.97, $3.92 higher than 2013.

But, as of now it looks like milk prices will be a lot lower this year. By last December the Class III price had declined to $17.82 after peaking at $24.60 back in September. The January Class III price will be about $16.00 and will likely decline further being in the low $14’s March through May before slowly improving and reaching the $16’s last quarter of the year.

The Class IV price has declined even more. The Class IV price peaked at $23.89 last August and declined to $16.70 by December. The Class IV price will be near $13.50 in January and not reach $14 until June and recovering to the low $16’s by November.

The US All Milk Price peaked at $25.70 last September, had declined to $20.30 by December and will be near $17.45 in January and in the 16’s March through May and reaching the $18’s by September. If this holds milk prices will average about $7 lower than 2014.

It looks like there will be payments under the Margin Protection Program at least for those producers who signed up with margin protection above the $6 level. At this time the probability that margins could actually be below $6 is quite low. But, it is early in the year and milk prices are very sensitive to rather small changes in milk production, domestic sales and dairy exports. So the year could turn out quite different than what I just described particularly for the second half of the year. There is just a lot of uncertainty when projecting milk prices six months to a year out.

The question may be what is causing milk prices to decline this far? The answer is increased milk production and lower dairy exports. Domestic sales with the exception of fluid (beverage) milk have been good and are expected to be good in 2015. But, milk production after increasing just 1.3 percent over a year ago January through June of last year increased 3.5 percent July through December finishing the year with an increase of 2.4 percent, the result of an average of 0.4 percent more cows and 2.0 percent more milk per cow.

Dairy exports which were setting new highs for the first half of the year reaching as much as 17.7 percent of milk production on a total solids basis in March declined significantly during the second half of the year. Latest export data is for November. Compared to a year ago exports were down 7 percent for nonfat dry milk/skim milk powder, 13 percent for cheese, 72 percent for butter and 17 percent for dry whey. Exports as a percent of US milk production declined to 14 percent in November.

Exports declined as world milk production increased and at the same time China, the largest importer of dairy products reduced their imports significantly. The result was a decline in world dairy product prices making US dairy products no longer price competitive on the world market.

Dairy product prices have taken quite a tumble bringing down milk prices. CME butter which averaged $2.97 per pound last September averaged $1.74 for December and is now $1.55. CME Cheddar barrel cheese which averaged $2.37 per pound last September averaged $1.56 for December and is now $1.45. CME 40-pound Cheddar blocks which averaged $2.35 last September averaged $1.63 for December and are now $1.47. CME nonfat dry milk which was as high as $2.07 per pound early in 2014 is now $.9525 and Western dry whey which averaged as high as $0.668 per pound last August is now $0.48.

With much more milk dairy product production was running well above a year ago with the exception of butter. Compared to a year ago during November butter production was 4.7 percent lower, American cheese production 4.5 percent higher, total cheese production 2.9 percent higher and nonfat dry milk production 48.9 percent higher. With the decline in exports skim milk powder production was 45.5 percent lower.

With higher dairy product production and lower exports stocks have increased modestly. Compared to last December 31, stocks of butter were still 12.3 percent lower compared to 17.0 percent lower on November 30, American cheese stocks were just 0.9 percent higher and total cheese stocks just 0.3 percent higher. November 30 stocks of nonfat dry milk were 89.7 percent higher.

How soon and how much dairy product prices and milk prices will improve will hinge heavily on the level of milk production and improvement in dairy exports. Currently milk production continues strong. USDA’s latest milk production report estimated December milk production at 3.1 percent higher than a year ago, the result of 1.1 percent more milk cows and 2.0 percent more milk per cow.

Texas led the increase at 9.7 percent by adding 30,000 more cows than last year and a strong 2.7 percent increase in milk per cow. Michigan’s milk production was 7.8 percent higher than a year ago by adding 12,000 cows and an increase of 2.5 percent milk per cow. Idaho had 14,000 more cows than a year ago and milk per cow was up 2.6 percent resulting in 3.5 percent more milk.

California’s milk production dropped slightly below a year ago at -0.1 percent due to 1,000 fewer cows and no increase in milk per cow. Increases in milk production for some of the other key dairy states were: Arizona 4.5 percent, New York 4.1 percent, Pennsylvania 3.3 percent, Kansas 6.4 percent, Colorado 6.6 percent, Utah 8.8 percent, South Dakota 6.4 percent, Iowa 4.9 percent, Minnesota 2.3 percent and Wisconsin 3.1 percent.

Besides California only two other states amongst the 23 reporting had less milk, Illinois – 0.6 percent and Oregon 0.5 percent. In total 20 of the 23 states had added cows over a year ago. We can expect milk production to continue to run strong at least for the first half of the year. But, with lower milk prices and lower margins the relative increase in milk production will slow as producers increase cow slaughter and not feed as aggressively for more milk per cow. But, for the year milk production may end up 2.6 percent higher than 2014. USDA is projection is a little higher at 2.8 percent.

Dairy exports for the year will likely be lower than 2014. World dairy product prices appear to have bottomed out with recent Global Dairy Trade showing some strength in prices. Milk prices are also much lower in the major exporting countries—New Zealand, Australia and the EU-28. New Zealand is also experiencing dry weather, which if it persists, will reduce their milk production in the months ahead. So the increase in world milk production will not be as high as it was in 2014. As accumulated dairy stocks are worked down dairy imports are expected to pick up the last half of the year particularly in China but at a more modest pace.

In summary, as the growth in milk production slows and dairy exports improve for the last half of the year we can expect milk prices to improve. But, unless milk production slows more than now anticipated and/or dairy exports improve more than anticipated milk prices will average much lower than 2014.

Dr. Bob Cropp is the Professor Emeritus at the University of Wisconsin-Madison


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