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Dairy Market Update: Growth in Milk Production Slows, Demand Remains Strong 
By Bob Yonkers, IDFA Chief Economist and Policy Analyst
The growth in milk production appears to have slowed from its rapid pace during the past 18 months, and demand for milk and dairy products has remained strong. In addition, early Fall marks the start of a robust demand period for most dairy products as retail pipelines begin to fill for the holiday season. As a result, wholesale prices for dairy products increased in recent weeks, leading to higher farm milk prices. While U.S. milk production was 5% higher in the first quarter of 2006 when compared to the same quarter last year, the U.S. Department of Agriculture (USDA) reports that milk production in July and August was only 1.5% higher than during the same months last year. Meanwhile, total dairy product sales were 2.8% higher (on a milkfat equivalent basis) in the first six months of 2006 compared to the same period in 2005. At the Chicago Mercantile Exchange (CME), the cash market price for cheddar cheese has averaged above $1.30 per pound so far in September, after averaging only $1.18 between the months of February and August. Grade AA butter prices also continued to rise this month. After averaging only $1.17 per pound on the CME cash market between February and July, Grade AA butter prices have averaged above $1.30 since early August. According to USDA's National Agricultural Statistics Service (NASS), market prices for both nonfat dry milk and dry whey also have increased in recent weeks from the lows seen in late spring. These higher wholesale prices for manufactured dairy products will be used to calculate minimum milk prices under federal and state marketing orders in the coming month. The Class III price, for example, which is the announced minimum price for milk used to manufacture most cheeses, averaged $11.02 per hundredweight between March and August. The September Class III futures contract at the CME, however, ended trading last Friday at $12.25. USDA will announce the September Class III price on Friday, September 29.
Posted September 25, 2006
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