Dairy Market Update: Industry Still Grappling with Production Shortfall Impacts

U.S. milk production has been climbing out of its slump recently, but the dairy market continues to cope with the consequences from the tight milk supply for much of this year. While prices for farm milk and wholesale dairy products have come down lately from earlier peaks, they are still at higher than average levels.

The U.S. Department of Agriculture (USDA) announced on September 17 that the October Class I minimum base price will be $14.78, up 84 cents from September. While October's price is below the record high of $21.13 set in June, the $15.30 annual average to date is well above the previous January-October record of $14.35 seen in 2000.

For Class III milk, the August minimum price in federal orders was $14.04. This is below the all-time record high of $20.58 set this May, but well above the August 10-year average of $13.01. So far in 2004, the Class III price has averaged $15.60; the previous record high for January-August was $13.53 in 1996. (The September Class III minimum price will be announced by USDA on October 1.)

This year's record high farm milk prices are being reflected in historically high prices in the wholesale dairy product markets. At the Chicago Mercantile Exchange, the January-August average cash market price for Grade AA butter was $1.84, besting the previous record for these months set in 2001 at $1.73. The $1.68 average cash price for cheddar cheese in 40-lb. blocks so far this year also tops the previous period high of $1.46, also in 2001.

Not unexpectedly, the tight supply/high price environment has impacted the production of dairy products. USDA reports that in July, every major dairy product posted a decrease in production as compared to July 2003. Production of butter in July, at 91.5 million pounds, was 5.6% below last year. Nonfat dry milk production was down 6.5% to 134.4 million pounds. While the cheese market has long been a bright spot for the dairy industry, production of total cheese also saw a downturn in July, decreasing 1.4% to 707.6 million pounds. Within the category, Italian-type cheese production fell by 1.2%, and American-type cheese production was down 2.6%. Even frozen dairy products suffered in July — often the month posting the year's highest output — with hard ice cream production falling by 6% to 91.8 million gallons, and frozen yogurt production down 9.4% to 5.8 million gallons. (USDA estimates of August dairy product production will be released on October 4.)

Looking ahead, milk production seems to be rebounding. After falling short of last year's level in every month from January through June, U.S. milk production was up slightly in July, and in August exceeded last year's production by 1.2%. In each month since January, the number of milk cows on farms has exceeded the immediately-preceding month. In addition, output per cow has exceeded last year in every month but March. (Milk production data for September will be released by USDA on October 15.)

Posted September 27, 2004