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Cropp: Supply & Demand Pushing Milk Prices Lower
Wisconsin Ag Connection - 10/26/2011

It has been a better year for U.S. dairy producers financially, but several factors are to blame for the recent shift in milk prices. Dr. Bob Cropp, professor emeritus with the University of Wisconsin-Extension, says softness in both dairy sales and dairy exports have resulting in lower prices during the second half of 2011. In this month's Dairy Situation and Outlook report, Cropp also points out that milk production is beginning to outpace demand.

"USDA estimated August milk production at 2.1-percent higher than a year ago, with some slowdown for September production, up 1.7-percent," Cropp said. "The September increase was due to 1.0-percent more milk cows than a year ago, but just 0.7-percent more milk per cow."

While cheese and butter sales have been favorable, fluid milk sales have been lower than a year ago. Cropp says nonfat dry milk exports for the period of January through July were 36-percent higher than a year ago. But in August, those exports slowed down substantially at just one percent.

"For this same period cheese exports were 41-percent higher than a year ago, but were 10-percent lower in August," he says. "Butter exports which were running well above year ago levels through June, up 57-percent from a year ago, dropped 36-percent below a year ago in July and six-percent below in August."

The report goes on to say that Class III milk prices, which set new record highs for July and August, have also been on the decline. Two months ago, the August Class III price was announced at $21.67 per hundredweight. That has already fell to $19.07 for September and will likely be below $18.00 for October.

Looking ahead, Cropp says farm milk prices for the remainder of the year and into 2012 will continue to be impacted by the level of milk production.

"The relatively strong increases in milk production continue to be driven by increases in the West and Southwest," Cropp said.

Fortunately for Wisconsin's dairy industry, the production of cheese has been slowing down in recent months; which could boost demand. Cropp says Cheddar cheese output for the month of August was 2.4-percent lower than a year ago and for the year-to-date 2.9-percent lower. Total production was below a year ago for both July and August, and up just under two-percent year-to-date.

"If cheese sales can continue to show some growth, along with anticipated favorable dry whey prices this would add support to Class III prices."

A growth in milk production well under 2% would help to support higher milk prices. USDA estimates milk production to end up 1.6-percent higher for 2011 with another 1.3-percent increase in 2012. Cropp says if Class III prices do drop well below $17.00 cwt. this winter, with high feed prices increased herd culling, less herd expansions and increased exiting of dairy producers can be anticipated. This would slow increases in milk production and support higher milk prices.

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