Dairy Market Update: Weather Wallops Milk Production, Especially in California

Moving into the second half of 2006, dairy market prices remain well below levels seen last year, but markets are getting tighter.

Severe and sustained high temperatures are having an adverse impact on farm milk production, according to the U.S. Department of Agriculture (USDA). As a result, heat-related declines in milk production have occurred in the Pacific Northwest, Southwest, Midwest and Northeast areas of the country. In fact, late-July reports show that farm milk production in California has dropped as much as 14% to 25% during the last week.

Weather will remain a key factor for the dairy industry in the coming months as it tries to assess the impact of high temperatures on current and future milk supplies. While it is not uncommon to see milk production and butterfat levels decline during the summer months, this year's weather has been unusually hot across most areas of the country for an extended period of time.

In addition, the dairy industry is closely monitoring conditions for U.S. grain and hay crops, because USDA reports that drought conditions exist across much of the central part of the country. To view a map showing drought-stricken areas, click here.

Inventories of manufactured dairy products during the first half of the year, however, remained well above inventory levels last year at this time. USDA's National Agricultural Statistics Service reported that commercial inventories of butter were 228.6 million pounds, which is 27% higher than they were a year ago. Total natural cheese stocks were at 863.9 million pounds, 6% higher than last year at this time.

At the Chicago Mercantile Exchange (CME) cash markets, Grade AA butter increased 5 cents in one week to close at $1.20 per pound on July 28. USDA's Agricultural Marketing Service reports that the cash butter market is "firm" with tighter cream supplies, because high summertime temperatures not only lower milk production, but they reduce butterfat levels in the milk that is produced.

While cheese prices at the CME have not yet moved higher, USDA reports that "buyers' interest is increasing" because cheese production in late July "is appreciably below just a few weeks ago." USDA also notes that nonfat dry milk prices are higher, and the Commodity Credit Corporation stopped purchasing nonfat dry milk under the Dairy Price Support Program last week.

Posted July 31, 2006