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Cropp: Class III Milk Price Likely Peaked in July
Wisconsin Ag Connection - 08/23/2011

Dairy producers are utilizing their earnings from the higher milk prices this summer to make up for losses incurred during the past two years. But Dr. Bob Cropp, professor emeritus with the University of Wisconsin-Extension, warns that we may have already peaked for the year. According to this month's Dairy Situation and Outlook report, Cropp explains that the Class III milk price set a record high in July at $21.39, $7.65 higher than a year ago, but predicts the August price to be announced around 40-cents lower.

"The August Class III price may be near $21.00, the Class IV price near $19.90 and the U.S. All Milk price near $22.00," said Cropp, noting that butter, cheese and nonfat dry milk prices are all showing some weakness. "CME cheddar barrel cheese prices had been above $2 a pound since June 6th. But, in the last three trading sessions barrel cheese lost 23 cents down to $1.865 per pound as of August 18th. CME cheddar blocks also had been above $2.00 per pound since June 6th, but lost 13.25 cents in the last two trading session down to $1.9075 per pound as of August 18th."

He says butter prices have held above $2.00 per pound. West nonfat dry milk prices, which have been near $1.65 per pound, are now trading in the $1.45 to $1.57 range. However, dry whey prices have been firm trading in the $0.57 to $0.60 range adding support to the Class III price.

During August and September, milk available for cheese making will be tighter as production and composition will decline with the changing of the seasons, and with schools opening channels for additional milk used for beverages.

Meanwhile, dairy exports have added strength to butter, cheese, nonfat dry milk and dry whey prices. But, world prices have weakened some and U.S. exports appear to be slowing down.

"While imports were also higher than a year ago, the increase was much less than U.S. exports resulting in a trade surplus of $1.16 billion for the first half of the year compared to a surplus of $732, 2 million during the first half of 2010," Cropp says. "Milk production is anticipated to recover in 2011-12 for both New Zealand and Australia, which account for about 40-percent of world dairy trade. This likely will lower U.S. exports this fall and into 2012, but yet remain relatively high historically."

Of course, the level of milk production for the remainder of the year will be a major factor where milk prices will end up. Cropp says USDA's estimated milk production for the month of July shows milk production continues above year ago levels, but the increase continues to slow.

"For the U.S. as a whole USDA estimated July milk production just 0.7-percent higher than a year ago compared to a 1.0-percent increase in June and increases of 2-percent plus during January through March," he notes. "The nation's cow herd continues to get larger from one month to the next which began with October of last year. This has occurred despite more dairy cows going to slaughter."

The report concludes that high feed prices will likely hold down increases in milk per cow. Cropp says with lower milk prices, the returns over feed costs will likely increase cow slaughter.

"However, there are some who are forecasting lower prices due to a sluggish U.S. economy affecting domestic demand and lower dairy exports," he points out. "Lower prices are definitely possible. But, if prices turn out much lower both the number of cows going to slaughter and producers deciding to exit the business would likely increase adjusting downward the level of milk production and adjusting milk prices upward."

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