ERS Raises Outlook For Two Milk Prices, Lowers One

By Ron Johnson, Dairy Editor
Wednesday, May 28, 2008 3:17 PM CDT

Two up, one down.

No, that’s not a snippet of play-by-play from a baseball game. Instead, it’s what the USDA’s Economic Research Service (ERS) says is likely to happen to average milk prices for the rest of the year. The ERS, in its May “Livestock, Dairy and Poultry Outlook” report, the Class III price and the Class IV milk price will average higher in 2008 than expected in April. By contrast, the ERS figures the “all-milk” price will average lower than it forecast a month ago.

The Class III price is the one that matters the most to most Wisconsin dairy farmers. It’s the price paid for “manufacturing” milk. That’s the milk that goes into cheese vats. Estimates place the amount of Wisconsin-produced milk used for Class III purposes at 80 percent on the low end to 95 percent on the high end.

This month the ERS says it expects the Class III price to average somewhere between $17 and $17.50 per hundredweight. That forecast is anywhere from five cents lower to 45 to 95 cents higher than the $16.55-to-$17.05 Class III range the ERS figured would materialize last month.

If last month’s predicted prices materialize, they would amount to a Class III price decline of 99 cents to 1.49, compared to last year’s $18.04 average. Now, however, if the new forecast comes true, the Class III price slippage would amount to 54 cents to $1.04 per hundredweight.

ERS economists also tried to gauge next year’s Class III milk prices. They expect it to average $16.80 to $17.80. That means the 2008 Class III price could average 20 cents lower, 30 cents higher, 70 cents higher, or 80 cents higher.

Meanwhile, the ERS has altered its prediction for the Class IV milk price. A month ago the ERS said the Class IV price would average $15.35 to $15.95 per hundredweight. Now the ERS says to look for it to average in a range of $15.45 to $16.05. The new numbers predict a Class IV average anywhere from 50 cents lower to 10 to 70 cents higher than the February prediction.

If the new, May, numbers prove out, the Class IV price would average $2.31 to $2.91 lower than it did last year. During 2007 it averaged $18.36.

As with the yearly average Class III price, the Class IV milk price is expected to average higher in 2009. ERS economists peg it at anywhere from $16.50 to $17.60 per hundredweight. If prices in that range materialize, they would be 55 cents to $2.25 higher.

The Class IV milk price does not have as much impact on Wisconsin dairy producers’ milk checks as the Class III price does. That’s because the Class IV is the price paid for milk used to make “soft” products like yogurt and ice cream.

Now let’s take a look at what the ERS expects to happen to the “all-milk” price. This price takes into consideration what farmers are paid for all classes of milk regardless of their utilization n bottling, cheese, butter, ice cream, yogurt and so forth.

The all-milk price is the only category the ERS expects to finish out 2008 averaging lower than it did last year. Its best guess in the May report is for the all-milk price to average somewhere between $17.95 and $18.45 per hundredweight.

Last year the all-milk price averaged $19.13. So if the ERS is right, this year the all-milk price will finish 68 cents 1.18 lower than it did in 2007. In its April report, the ERS figured this year’s all-milk price would average $17.65 to $18.15.

Next year the all-milk price could rebound somewhat. The ERS expects it to average $17.90 to $18.90 in 2009.

These milk price predictions come in spite of rising milk production, points out the ERS.

“Despite higher feed costs, milk production continues to rise, and the rate of increase this year will be 2.3 percent higher than in 2007,” says the report. “Current-year production is projected to be above 2007, at 189.8 billion pounds. Milk production is forecast to rise by only 0.3 percent, to 190.4 billion pounds in 2009. The effect of this year’s soaring feed costs on cow numbers likely will not be apparent until 2009.”

By year’s end, the U.S. will be home to some 9.265 million dairy cows, says the ERS. But it expects that number to fall a bit n to 9.23 million in 2009.

“A slowing of growth in California due to production restrictions by cooperatives there, limited possibilities of exporting cows to nearby states, and continuing exits in eastern and midwestern states is the source of the pullback,” explains the ERS.

Along with more cows this year is coming higher milk production per cow. After adjusting for Leap Day n the 29th day in February this year n milk production will climb by 0.8 percent this year, says the ERS.

Next year will likely bring higher per-cow milk production, too. But the ERS expects it to once again rise by less than 1 percent, to an average of 20,630 pounds per cow.

“The milk: feed price ratio could become more favorable toward the end of 2009, mostly because of higher milk prices rather than because of any expected declines in feed costs,” comment ERS economists.

Meanwhile, domestic demand for U.S. dairy products remains “relatively strong,” according to the May outlook report. In addition, exports are still showing “substantial growth” when measured on the basis of milkfat.

One dim spot for exports is skim milk and milk solids. The ERS expects those to drop.

“Continued increases in exports will likely keep cheese and butter prices firm in 2008,” says the ERS. “Consequently, commercial use, which now more closely gauges domestic use, is projected to rise about two percent in 2008 over 2007, but is forecast to rise only slightly more than one percent in 2009. Production is moving more toward butter and powder at the expense of cheese, as cheese production capacity is limited.”

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