Dairy Market Update: January 2006

By Bob Yonkers, IDFA Chief Economist, PhD

Milk production growth continues its torrid pace, with total U.S. production up 3.9% last month compared to December one year ago. For the 23 major dairy states, production grew 4.3%. This growth was led by the usual state suspects, with New Mexico up 13.8%, Texas up 12.3%, and Idaho up 10.9%. Some Midwest states also saw significant increases, with Indiana gaining 9.3% and Michigan up 6.4%. USDA reports that, subject to revision, 2005 calendar year milk production in the U.S. grew by over 3.6% after accounting for the extra leap day in 2004.

Meanwhile, USDA reports that commercial disappearance (which represents total demand) for milk and dairy products grew by only 2.5% for January through November (the latest data available) compared to the same period in 2004 after correcting for the extra leap day. With supply growth exceeding demand growth by such a significant margin, something had to give, and that something was milk and dairy product prices.

The price of Grade AA butter at the Chicago Mercantile Exchange (CME) closed on January 27 at $1.2650 per pound, down from $1.41 at the start of January. The last time this butter price averaged this low for a month was in November 2003. The price of Cheddar cheese in 40-lb blocks at the CME closed at $1.2375 last week, 13 cents below the price at the start of the month. This was the lowest price for block cheese at the CME since June 2003. Meanwhile, USDA reports that the price of nonfat dry milk in the western U.S. is moving lower also.

All this comes after two of the best farm milk price years on record. The all-milk price paid to producers averaged $16.05 per hundredweight in 2004, the highest annual average by far. In 2005, USDA reports this price fell to an average of $15.14, the third highest on record. The farm milk prices seen the past two years have been far in excess of the average of either the last five years ($14.20 for 2001-2005) or last 10 years ($14.10 for 1996-2005). USDA expects the all-milk price paid to producers for calendar year 2006 to average between $13.40 and $14.20.

Posted January 30, 2006