USDA’s milk production report shows October production increased to 1.4% higher than a year ago; September production was 1% higher than a year ago.
“This is a lot of milk considering that last year, milk production was running 2.5% higher than a year ago,” says Bob Cropp, University of Wisconsin Extension dairy economist.
The October increase was the result of 0.7% more cows and just 0.6% more milk per cow.
“Overall the increase in milk production will put some downward pressure on milk prices,” Cropp says.
The September Class III price was $16.36. The normal seasonal increase in dairy product sales helped boost the October Class III price to $16.69.
“The November Class III is expected to be up slightly to around $16.80,” Cropp says. “But dairy product prices have declined, meaning the December Class III price could fall below $16, to around $15.45.”
Milk prices higher in 2017
That puts the average for 2017 at about $16.15, compared to $14.48 last year – an increase of more than a $1.65.
According to Cropp, the Class III price is driven by the price of butter, cheddar cheese and dry whey. The price of butter on the Chicago Mercantile Exchange averaged $2.65 per pound in August, but declined steadily since then, hitting $2.21 at the end of November. The amount the price declined is a little surprising in that September butter production was 0.3% lower than a year ago and Sept. 30 stocks were 4.5% lower than a year ago. But butterfat exports, which had been running higher than a year ago, fell 16% in September, resulting in year-to-date exports up just 9%. Butterfat exports had been aided by Europe butter being priced higher than U.S. butter on the world market. The price of butter could still fall further, but should stay above $2 per pound.
Cheddar cheese prices were above $1.70 per pound in October and the first two weeks in November. But both cheddar blocks and barrels are now below that mark — barrels are $1.64 and blocks, $1.60. Cheese stocks remain ample, with Sept. 30 American cheese stocks 4.7% higher than a year ago and total cheese stocks 5.7% higher.
Cheese production has been relatively strong, with September production of cheddar cheese 4.5% higher than a year ago and total cheese production 2.7% higher. Domestic cheese sales have been fair. But cheese prices have benefited from higher exports. September cheese exports were 23% higher than a year ago and 24% higher year to date.
According to the U.S. Dairy Export Council, the European Union exported 43% more skim milk powder from January through August compared to the previous year. Canada, with aggressive pricing below both the EU and the U.S., has increased exports of skim milk powder. Canada previously was exporting about 1,000 tons of skim milk powder per month but is now exporting 8,000 to 10,000 tons.
“In addition, Mexico having concerns about the outcome of current NAFTA negotiations has reduced its source of nonfat dry milk imports from the U.S.,” Cropp says. “Mexico last year sourced 94% of its nonfat dry milk from the U.S. This has dropped to 77%, as Mexico is now sourcing from both the EU and Canada. As a result, the price of nonfat dry milk has fallen to $0.715 per pound, a level not seen since early last year.”
USDA and other forecasters have lowered their price forecast for 2018. Both Class III and Class IV futures for 2018 have fallen. Class III futures are in the $14s from January through May and in the $15s for the remainder of the year. Class IV futures start the year below $14, and reach the $14s by March and the $15s by August. If these prices hold true, milk prices in 2018 will average lower than 2017 prices. USDA reports the Class III price in 2018 could average as low as $15.50 and the Class IV price as low as $14.15. But according to Cropp, final milk prices will depend on the level of milk production, domestic sales and exports.
USDA is forecasting an increase in 2018 milk production of 1.8%, from a 0.5% increase in the average number of milk cows and 1.3% more milk per cow. This is a lot of milk, Cropp says, “but if milk prices start the year near current futures market prices, we could see heavier culling of milk cows and a lower increase in milk per cow.”
All eyes on exports
Domestic sales of butter and cheese should continue to be favorable in 2018, Cropp says. But he believes a crucial factor in where milk prices end up will be dairy exports.
“For most of this year, milk production for four major exporters — EU, New Zealand, Argentina and Australia — was lower than the year before. The U.S. was the exception with increased production,” Cropp says. “But milk production has now started to increase in all five exporters, meaning the U.S. will face strong competition for markets in 2018. Unless there is good growth in world demand to absorb this increase in milk production, world dairy product prices will decline.”
China and others are expected to increase their imports, but world prices have already started to decline, which will put pressure on U.S. prices.
“But still, I feel milk prices will end up higher than current futures market prices, particularly for the last half of the year, from a little lower increase in milk production and prices supported by domestic sales and exports,” Cropp concludes.