The severe drought for a good share of the U.S. continues to foster the outlook for higher milk prices, the result of less milk production due to high feed costs this fall and winter reducing both milk cow numbers and the increases in milk per cow.
For September the Class III price will be near $18.85, an increase of about $3.65 from the low of $15.23 back in May. Yet the Class III price would still be lower than a year ago at this time when the September price was $19.07 and yearly high was $21.67 for August. We could easily see a Class III price of $20 plus by October and through at least the first four or five months of next year. The Class IV price for September will be near $17.50, up about $4.25 from the low of $13.24 back in June. Like Class III the Class IV price is still lower than a year ago when the September price was $19.53 and its peak of $21.05 in June. The Class IV price could easily be $19 plus by October through the first quarter of next year.
Milk production which was running 4 percent higher than a year ago for the first quarter continues to slow down. Increases over a year dropped below 1 percent in June at 0.9 percent, July at 0.6 percent and for August it fell below year ago levels at -0.3 percent. Dairy cow slaughter in recent weeks has been running 10 to 15 percent higher than a year ago, but with the ample supply of dairy replacements the decline in the nation's dairy herd has been slow. Cow numbers didn't start to decline until May and as of August numbers had decreased by 51,000 head. For the nation, August cow numbers were still 0.2 percent higher than a year ago. Of the 23 reporting states only three states had fewer cows in August than July and only seven had fewer cows than a year ago. USDA is forecasting cow numbers to continue to decline through the first half of next year and the average number of cows for next year to be 1.1 percent lower than this year's average.
The increase in milk per cow is also slowing. In fact, August milk per cow was estimated at 0.5 percent lower than August a year ago. Of the 23 reporting states, eight had less milk per cow than a year ago. USDA estimates the increase in milk per cow for this year to be 1.6 percent, but only an increase of 0.6 percent for next year. The net result is an estimated increase in total milk production this year of 1.8 percent and a slight decline of 0.5 percent next year. However, this year's increase is probably on the high side since milk production is likely to continue to run below a year ago for the remainder of the year and these percentage changes don't take into consideration the extra day this year due to leap year.
Looking at some individual states August milk production was lower than a year ago in Western states by as much as 5.8 percent in California, 3.8 percent in Arizona, 0.2 percent in Idaho, 2.9 percent in New Mexico, and 1.9 percent in Texas. Of these states only California and Texas still had a few more cows than a year ago. All except Idaho had less milk per cow with decreases of 6.3 percent in California, 3.0 percent in Texas, 2.8 percent in Arizona and 2.4 percent in New Mexico. In the Northeast Michigan's milk production was up 5.4 percent and up 1.9 percent in New York but down 1.7 percent in Pennsylvania due to both fewer cows and less milk per cow. In the Midwest milk production was up 2.5 percent in Iowa, 2.7 percent in Minnesota and 4.9 percent in Wisconsin. For Wisconsin cow numbers were 0.6 percent higher and milk per cow 4.3 percent higher.
Sales of fluid (beverage) milk continue very sluggish with January through July sales 1.6 percent lower than a year ago. But, reports on cheese and butter sales remain positive. There is some concern that higher prices could dampen sales, but thus far there is no evidence of this. On the CME August butter averaged $1.77 per pound and is now $1.8675, about the same as a year ago. Butter is expected to stay at this level or higher for the next several months. Last year butter was above $2 per pound for the first eight months. Cheddar cheese in 40-pound blocks averaged $1.83 per pound in August and is now $1.95 compared to $1.76 a year ago. Cheddar barrels averaged $1.79 per pound in August and are now $1.905 compared to $1.70 a year ago. But, both 40-pound block cheddar and cheddar barrels were over $2 per pound for part of the summer last year. Both nonfat dry milk prices and dry whey prices have also shown considerable strength in recent weeks. West coast nonfat dry milk is now trading as high as $1.67 per pound and dry whey as high as $0.61 per pound and further price increases for both are likely.
These stronger dairy product prices and in turn milk prices is partially driven by good domestic sales and exports that have tightened up stocks. The latest export data is for the month of July. But, while on a volume basis for the period of January through July nonfat dry milk and cheese exports were higher than a year ago, up 7 percent and 20 percent respectively, both experienced lower volumes for the second a month in a row. Compared to a year ago, July exports of nonfat dry milk were 13 percent lower while cheese exports were still 35 percent higher. Dry whey exports were 16 percent lower than a year ago in July but exports of whey protein concentrates were 57 percent higher. Butter exports have been below a year ago all year with July exports down 32 percent and year-to-date exports 28 percent lower. But, on a total solids basis July exports were still equivalent to 13.4 percent of U.S. milk production. While higher prices and a slowdown in milk production could well dampen exports in the months ahead, exports will remain a positive factor for dairy product prices and milk prices. With leading dairy exporters like U.S., the 27-EU countries and Argentina all experiencing a slowdown in milk production due to drought and/or much higher feed prices, and this along with continued positive world demand, the world milk supply and demand situation will remain fairly tight. An expected positive increase in milk production in the leading exporter New Zealand and also Australia could lessen the tight world supply situation later on. But, for now world prices of skim milk powder, dry whey and cheese have shown strength in recent weeks.
Butter stocks have been declining since May, but July 31 stocks were still 23.5 percent higher than a year ago. Nevertheless, butter production was running below a year ago and butter makers feel that existing stocks may be tight for fulfilling the strong seasonal butter orders during the Thanksgiving and Christmas period. July 31 American cheese stocks were 2.3 percent below a year ago and total cheese stocks 3.8 percent below. Nonfat dry milk stocks continue to decline being down 11.3 percent from the peak in May and were 32.3 percent lower than a year ago.
In summary, milk prices will be much improved for the remainder of the year through at least the first half of next year. But, high feed prices will keep returns over feed costs at low levels for many dairy producers who need to purchase grains and concentrates as well as some who need to purchase hay or other forages.