Wisconsin Ag Connection - Cropp: Dairy Prices Finally Starting to Make a Comeback

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Cropp: Dairy Prices Finally Starting to Make a Comeback
Wisconsin Ag Connection - 09/24/2009

An expert on dairy markets says the recovery of low milk prices hinges on a slow down in milk production and that's finally starting to happen. Dr. Bob Cropp, professor emeritus with the University of Wisconsin Cooperative Extension, released his monthly Dairy Situation and Outlook report this week, where he cited the September 18 milk production report that indicated the nation's first slowdown in year-to-year production in quite some time.

According to the latest numbers from the USDA, total milk output for July and August were down, while dairy cow slaughter was up.

"Milk production continues to decline in the West and increase in the Midwest and some Northeast states," Cropp said. "Cow numbers are down 3.5-percent from a year ago in California and with milk per cow 1.1-percent lower total milk production was 4.5-percent.

Production and herd numbers were also lower in Idaho, Arizona and New Mexico. Wisconsin had 3.7-percent more milk production from 0.4-percent more cows. Minnesota's herd grew less than one percent and increase its milk output by 4.4-percent.

He also said that we can expect some improvement in domestic milk and dairy product sales to support the price recovery.

"With a major share of butter and cheese moved through restaurants and food service the downturn in restaurant traffic and a slower summer resort business has damped sales," Cropp said. "Nevertheless, recent data indicate that cheese sales are improving and are now running above year ago levels. And some fast food service such as McDonalds has recently come out with new sandwiches that use increase amounts of cheese."

At the retail level prices continue to drop which also will help sales. Compared to a year ago, the index of retail prices for all dairy products in August was 18-percent lower than a year, the lowest in two years.

And Cropp noted that another major factor for depressed milk prices has been the loss in dairy exports.

"While still well below year ago levels, exports are also showing some improvement," he said. "In July, U.S. suppliers exported 28,172 tons of nonfat dry milk/skim milk power, the most since September 2008, but still down eight-percent from a year ago. Cheese exports in July were 9,459 tons, the most since October 2008, but still 13-percent lower than a year ago."

Meanwhile, USDA's latest price outlook shows the recovery in milk prices to be a slow process. Class III futures also show a slow recovery. However, Class III futures showed improvement last week. September 18 Class III futures for December settled at $13.97, January 2010 at $14.03, July at $15.01 and December at $15.80.

"I remain more optimistic than this with the possibility of Class III above $14.00 by December, near $16 by July 2010, and in the high $16’s by December 2010," he points out. "But, for these higher prices to occur milk production needs to continue to decline into 2010 and domestic sales needs to show improvement. History tells us that milk prices can increase rather quickly with anticipation of tightness in the market."