Milk Production Ebbs, but Demand Remains Robust, Pushing Prices Higher

While still growing, milk production has slowed considerably compared to earlier months in 2006, but the demand for milk and milk products remains robust. This combination of ebbing production and rising demand has pushed wholesale prices for manufactured dairy products ever higher in the fourth quarter.

The trend is expected to continue into 2007, according to the U.S. Department of Agriculture (USDA). USDA expects the all-milk price received by farmers to average about $12.80 per hundredweight this year, but the average could reach between $13.00 and $13.90 in 2007, USDA predicts.

Although growth in milk production climbed 4% to 5% in the first half of 2006, farm milk production has dropped off, growing only 1.5% to 2% in recent months. USDA forecasts that production for all of 2006 will be 4.9 billion pounds higher than last year, with an overall increase of 2.8%. For 2007, USDA expects milk production growth to slow to only 0.6%, an increase of only 1.1 billion pounds above this year's record level.

Meanwhile, USDA forecasts that the commercial disappearance of milkfat will increase 2.6% this year, and the use of skim solids will grow by 2.3%. USDA expects growth in 2007 to be nearly as strong in both categories; demand for milkfat will likely increase by 2.3% and demand for skim solids is anticipated to grow by 1.8% next year.

The futures market also expects higher prices next year based on recent settlement prices for the Class III milk futures contract at the Chicago Mercantile Exchange (CME). While market participants expect the Class III milk price to average about $11.90 in 2006, they anticipate an increase of more than $2.00 per hundredweight in 2007, bringing the estimated average trading price for the Class III futures contract to about $14.20 for next year.

In addition, dairy market analysts are closely watching the markets for feedgrains and oilseeds. Recent prices for the December 2006 corn futures contract climbed higher than they've been in more than a decade. Corn is in demand for manufacturing ethanol, as well as for livestock feed and high fructose corn syrup (HFCS). These rising demands, combined with greater-than-usual demand from the export market, are factors in the recent dramatic price rise.

Corn is traditionally a key feed ingredient for dairy cows, along with soybeans and/or soybean meal, which also have seen recent price increases. Continued higher feed costs into 2007 would mean higher feed costs for dairy cows, putting further downward pressure on milk production growth.

Posted November 20, 2006