Market Watch Dairy: Milk Supplies Come Back

June 1, 2010 12:23 PM

While the industry debates supply management proposals and other ways to redraw milk pricing policy, industrious dairy producers are finding ways to produce more milk, even at current prices.

Initial estimates showed total U.S. milk production in April at a record-high 16.4 billion pounds, up 1.5%, the largest year-over-year gain in more than a year. Cow numbers have increased for four straight months. For the first time, production per cow topped 60 lb./day. And California output was up fractionally in April, the first gain in 17 months.

Dairy slaughter is running about the same as last year, but more replacements are available to fill the stalls. In addition, feed costs are about 15% below a year ago and milk prices are 25% to 30% higher. So margins, though not great, are sufficient for many to stop the bleeding.

In its May 19 Livestock, Dairy, and Poultry Outlook report, USDA projected higher producer returns for the rest of 2010 and into 2011, thanks to moderating feed costs and steady commodity prices. Better returns, however, will lead to more milk, which will limit milk-price gains, USDA says. The department projects milk production to increase 0.9% in the second half of 2010 and expand 1.5% in 2011.

Will consumption be strong enough to absorb this additional supply? So far in 2010, domestic dairy consumption has been sluggish. Domestic cheese use was up about 1.4% in the first quarter, but butter use was down about 0.6% and fluid milk sales were off 0.8%.

Fortunately, export sales have bounced back to take up some of the growing U.S. supply. In the first quarter, U.S. dairy exports were up 23% on a total-solids basis.

USDA predicts increased exports throughout 2010 and 2011, driven by continued global economic recovery. "U.S. dairy products are competitively priced on world markets, and production from Oceania countries fell short of early season forecasts,” the department says.

However, at this writing, the global economy is standing on shaky ground and world dairy commodity prices are starting to pull back as a result of the weaker euro and the release of EU intervention stocks of milk powder and butter. Oceania supplies are indeed short, but much of that tightness depends on continued heavy imports from China.

Given the rebound in U.S. milk production and the uncertainty of domestic and global demand, prospects for a major bull-market turnaround continue to dim.

Bonus content:

USDA''s monthly Livestock, Dairy, and Poultry Outlook report


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