Strong Demand Drives Milk Prices Higher, Despite High Feed Costs

July 22, 2011 12:31 PM

Dairy cow numbers are forecast to fall slightly in 2012, but production is expected to continue to climb.

Domestic and export dairy demand is climbing, driving milk prices – and milk production -- higher, USDA’s Economic Research Service (ERS) said in its July 18 “Livestock, Dairy, and Poultry Outlook.”
Milk production continues to rise, despite high feed prices, the report said. Climbing domestic commercial use and exports are keeping milk and dairy product prices high. Cow numbers are forecast to fall slightly in 2012, but production is expected to continue to climb. Higher milk production will likely lead to lower milk and product prices in 2012.
ERS forecasts the 2011 All-Milk Price to average $20.00 to $20.30 per cwt., and the 2012 average at $17.75 to $18.75 per cwt.
Corn, soybean prices decline; alfalfa climbs
The June Acreage report indicated that producers planted 92.3 million acres of corn, up 4.1 million acres from last year, and the second highest since 1944. The prospects for a larger crop in 2011/12, coupled with larger beginning stocks, resulted in lower expected corn prices compared with last month’s forecast. Corn prices are forecast at $5.50 to $6.50 a bushel.
Soybean meal prices were lowered this month from last month’s forecast to $345 to $375 a ton. While corn and soybean prices in 2011/12 are likely to be lower than earlier season expectations, forage prices could remain near record highs.
Nationally, alfalfa prices set a record high in May. The June Acreage report confirmed expectations that the harvested area of alfalfa hay and alfalfa mixtures had declined from 2010. The expected harvested area decline, along with severe drought in parts of Texas and the southwest and excessive wetness in parts of the northwest (which adversely impacted first cutting), will keep alfalfa hay prices high for the rest of 2011 and into 2012.
On balance, the change in feed ingredient prices will offer only scant relief for dairy producers, as the benchmark 16-% protein ration will likely remain well above 2010 for both the balance of 2011 and 2012.
Dairy cow numbers increase
Dairy cow numbers continue to advance and are projected to average 9.185 million head this year. Some retrenchment is expected in 2012 based on relatively high feed prices and lower expected milk prices in 2012. Milk per cow is estimated at 21,305 pounds this year and forecast at 21,665 pounds in 2012; both numbers are unchanged from June.
The result will be continued expansion in milk production, with 195.7 billion pounds expected in 2011 and 198.8 billion pounds forecast for 2012. This year, both an increase in cow numbers and output per cow support the rise. In 2012, a strong year-over-year rise in output per cow, and the added leap-year milking day, will offset the expected decline in cow numbers.
According to the June Milk Production report in the 23 surveyed states, the strongest percentage increases in year-over-year milk production were posted in Western states, with Texas, Colorado, and Arizona leading the rise. Declines in milk production were observed in the Midwest with Ohio, Illinois, and Missouri showing the largest declines in 2011 from 2010.
Exports strong but could cool in 2012
Exports have shown resiliency to date, but will likely decline next year. Milk equivalent exports are forecast at 8.8 billion pounds this year on a fats basis, based on continued strong shipments of butterfat. The forecast represents an increase from last month’s forecast. Exports in 2012 are forecast at 8.7 billion pounds, unchanged from last month. The competitive price advantage for U.S. butter in world markets has narrowed considerably, which could ultimately slow exports.
Milk equivalent skims-solids exports were increased slightly from last month to 32.1 billion pounds for 2011 and are unchanged from last month at 32.3 billion pounds forecast for next year.
Domestic use continues to grow
Growth in domestic commercial use of dairy products continues despite slow economic growth. Domestic commercial use is forecast at 188.8 billion pounds this year on a fats basis, but a stronger rise is forecast for 2012 as use is forecast to rise to 192.2 billion pounds. Somewhat stronger economic growth and moderating prices, especially for butter, prompt the rise. Year-to-date use through April shows butter 15% above 2010, American cheese 4% above last year, and other cheese 7.1 percent above last year. Domestic commercial use, on a skims-solids basis, is on track for a robust 2.1% year-over-year rise to 167.5 billion pounds for 2011. For 2012, domestic use is forecast at 170.4 billion pounds, a strong 1.7-% rise.
Dairy product prices were revised upward from June’s estimates. Cheese prices are projected higher based on current price strength. Cheese prices are forecast to average $1.815 to $1.845 per pound this year and fall to $1.660 $1.760 in 2012 based on continued increases in milk production. Butter prices may have reached their zenith in the second quarter. Increased butter and nonfat dry milk (NDM) production, both domestically and internationally, could lower prices later in the year for both products. However, butter prices could firm toward the end of 2011 as more milk moves to cheese production.
Butter prices are expected to average $1.925 to $1.985 per pound in 2011 and slide to $1.615 to $1.745 per pound in 2012. NDM prices reflect the robust export outlook for NDM and will likely average $1.520 to $1.550 per pound in 2011 and decline slightly to average $1.375 to $1.445 per pound in 2012. Whey prices are forecast at 47.5 to 49.5 cents per pound for the current year and 41.0 to 44.0 cents per pound in 2012.
Price outlook points downward
The price outlook for the major dairy products points to slowly declining milk prices toward the end of 2011 and into 2012. The Class III price is forecast at $18.00 to $18.30 per cwt. this year and $16.00 to $17.00 per cwt. next year. The Class IV prices continue to lead Class III prices both this year and next, averaging $19.15 to $19.55 per cwt. and $16.50 to $17.60 per cwt. in 2011 and 2012, respectively.

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