USDA Foresees Decreasing Milk Production from High Feed-Price Pressure

January 21, 2011 09:50 AM

Year-over-year milk production increases slowly adjusting supply to demand, holding all-milk price near 2010 level

Higher feed prices will pressure dairy producer margins in 2011, limiting any increase in milk production, USDA’s Economic Research Service (ERS) said this week in its January Livestock, Dairy, and Poultry Outlook

Both imports and exports are projected below last year’s totals, especially for fats. Exports of powder and whey continue to be strong, but higher global output will likely limit exports, ERS said. Cheese supplies appear adequate to meet expected demand, and butter prices should ease over the course of the year as stocks rebuild.

Class IV prices will likely average above Class III prices and the all-milk price will remain near the 2010 price.

The latest USDA forecasts indicate rising feed prices for the 2010/11 crop year. The corn price is forecast to average $4.90/bu. to $5.70/bu., and the soybean meal price is forecast to average $320/ton to $360/ton. These latest price forecasts represent an increase from last month’s forecasts.

Positive processor margins for ethanol and strong exports will contribute to the higher price. Supplies of corn are expected to be lower as yield per harvested acre is expected to be lower than in 2009/10, despite higher planted acreage. Supplies of soybeans and soybean meal are also forecast to be slightly lower than in 2009/10.

Meanwhile, USDA’s most recent milk production report indicated that estimated U.S. milk production rose 2.7% in November on a year-over-year basis. Cow numbers also continue to rise on a year-over-year basis. However, herd size was unchanged in November from October. This situation suggests producers may be responding to lackluster feed-price ratios that persisted in 2010 and are likely to worsen in 2011 due to higher expected feed prices, ERS said.

USDA’s Cattle Report, which will be released Jan. 28, will provide an early indication of producer intentions regarding dairy heifer retention. The current forecast calls for cow numbers to average 9.1 million head in 2011, the first annual increase since 2008. High cow slaughter and heifer prices that are about unchanged from last year suggest little incentive for herd expansion. The ERS report said availability of heifer replacements at modest prices could provide an opportunity to some producers for herd freshening, which could be a cost-reducing strategy with higher feed prices in the offing.

Milk per cow is projected to rise 1.3% this year over last to 21,425 lb. Total milk production in 2011 is expected to reach 195.5 billion pounds, compared with 192.8 billion pounds for 2010. Milk equivalent exports for 2011 are forecast at 6.4 billion pounds on a fats basis and 30.7 billion pounds on a skim-solids basis. Although representing a retreat from 2010 exports, these forecasts have been raised from last month largely on improved skim-solids basis exports.

U.S. dairy product prices are below international prices and a weak dollar relative to foreign currencies makes U.S. dairy products attractively priced. Global demand should be higher in 2011, especially in Asia and South America, because economic recovery in those regions has been stronger than in Europe and the United States. What remains to be seen is the scope of recovery in milk production in Oceania.

U.S. imports of dairy products will trail last year’s totals and have been adjusted downward. Imports for 2011 are forecast at 3.9 billion pounds on a fats basis and 4.7 billion pounds on a skim-solids basis. The same fundamentals that make U.S. exports attractive on the world markets weaken the U.S. import market.

Butter stocks remain very tight, and consequently, butter prices are expected to remain high relative to recent years but to average below 2010 levels. Butter prices are expected to decline in the second half of 2011 as foreign production eases global tightness and more milk to move to Class IV uses due to adequate domestic supplies of cheese and strong export demand for nonfat dry milk (NDM). Butter prices are forecast to average $1.545/lb. to $1.655/lb. in 2011.

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