July milk output in 23 largest producing states

Milk producers are enjoying one of their more profitable periods in recent years due to strong export demand for dairy products and much lower feed costs. How long it will last is uncertain as the values of four key products have shown vastly different price moves in recent weeks, and increased milk production may provide for a build-up in product stocks in 2015.

As September began, butter prices set fresh record highs last week and CME Group cheddar cheese values were climbing to at least five-month highs and were 30% above year-ago levels. Dry whey prices had declined about 7% from May highs but still were about 13% above year-ago levels. On the opposite end of the spectrum, nonfat dry milk values had tumbled as much as 35% from March highs and were down about 25% from a year earlier.

The prices of those four products — butter, cheddar cheese, dry whey and nonfat dry milk — determine what farmers receive for their milk based on a long-standing government formula.

“U.S. milk production for the month of July demonstrated on-farm economics perfectly,” Rabobank said in its August North American Agribusiness Review. “After months of continued high farmgate milk prices and cheap feed costs, milk production has taken off.”

July milk production surged 4% from July 2013, according to U.S. Department of Agriculture data. It was the largest monthly year-over-year percentage increase since 8.2% in February 2012 over February 2011, with the former aided by an extra day due to leap year. The jump followed an increase of 2.3% in June and increases of 1.1% to 1.6% monthly from January through May, resulting in a total January-July increase of 1.9% from the same period in 2013.

“This increase has been driven mostly by higher yields,” Rabobank said. “Farmers have leveraged cheap grains to ensure their cows are consuming the best feed, thereby boosting output. As long as feed remains cheap and farmgate prices stay high, U.S. milk production growth should continue.”

Milk production per cow in the 23 major producing states averaged 1,911 lbs in July, up 61 lbs, or 3.3%, from July 2013, the U.S.D.A. said in its latest Milk Production report.

“This is the highest production per cow for the month of July since the 23 state series began in 2003,” the U.S.D.A. said.

Milk production in California, the nation’s largest producing state, increased 4.4% in July despite extreme drought, higher hay prices and fewer milk cows than in July 2013, U.S.D.A. data showed. Milk per cow in California at 1,980 lbs was up 85 lbs, or 4.5%, from July 2013.

Farmers overall have been building dairy herds. There were 8,578,000 milk cows on farms in the 23 major states in July, up 56,000 head from July 2013 and up 6,000 from June 2014, the U.S.D.A. said.

The number of dairy cattle culled and sent to slaughter in the January-July period totaled 1,623,000 head, down 11% from the same period in 2013, the U.S.D.A. said in its latest Livestock Slaughter report. The decrease has come despite record high cattle and beef prices in recent months.

“The attractive feed and milk prices have provided an incentive for producers to raise milk production,” the U.S.D.A. said in its August Livestock, Dairy and Poultry Outlook. “High replacement heifer prices and strong cull cow prices may have dampened the expansion.”

At least the feed side of the equation for milk producers seems fairly clear going forward, with the caveat of drought in California, due to record high 2014 corn and soybean crop forecasts. And most analysts expect production will be higher than the U.S.D.A.’s August forecasts. The U.S.D.A. will update its forecasts on Sept. 11. Corn futures prices were trading at more than four-year lows last week.

Production of alfalfa, the third major ingredient in dairy cattle rations with corn and soybean meal, is forecast 10% higher in 2014, although the U.S.D.A. noted prices were above 2013 levels due to drought in the West and strong demand from the dairy sector.

The supply, demand equation

Supply and demand factors for dairy products are a bit cloudier, though. Analysts generally agree exports have been a key driving factor in demand for dairy products, although domestic demand also has been good, especially for butter and cheese. Year-to-date exports through June for butter and butter oil were up 60% from a year earlier, cheese was up 34%, whey and whey protein concentrates were up 30% and nonfat dry milk was up 16%. But those trends may be changing as U.S. prices have remained strong and world prices have declined.

“Butterfat exports in June were well below year-earlier levels as U.S. prices are uncompetitive with world prices,” the U.S.D.A. said in its Outlook report.

The Russia-Ukraine conflict further complicated the world trade picture as Russia is the world’s second largest importer of dairy products, although U.S. exports of dairy items to Russia are small. Sanctions against Russia stemming from the invasion of Ukraine, while likely to have little direct impact on U.S. dairy exports, are expected to have a negative indirect impact because Europe is a major exporter to neighboring Russia. As Europe sends fewer products to Russia, it is expected to compete with U.S. exports in other markets, where U.S. prices already are at a disadvantage. The U.S.D.A. noted that nearly a third of European Union cheese exports go to Russia.

“This is a significant downside factor for international prices,” Rabobank said.

In its August Outlook, the U.S.D.A. raised 2014 price forecasts from July for all classes of milk and for the four milk price component products (cheese, butter, dry whey and nonfat dry milk). The 2014 all milk average price was forecast at $23.55 to $23.75 a cwt, up 20c to 30c a cwt from July, with an increase of 30c to 60c a cwt expected in class 4 milk (used for butter production).

Price projects for 2015 were mostly unchanged from July for milk and the four products, although all were well below 2014 levels.

“Milk prices follow the pattern of dairy product prices, high this year and falling in 2015,” the U.S.D.A. said. “Prices (for 2015) are sharply down on lower export prospects and higher expected milk production.”