The USDA’s Economic Research Service expects the Class III milk price to average between $14.50 and $15.50 next year.

By Ron Johnson Dairy Editor
Sunday, December 28, 2008 9:06 PM CST

Milk prices will likely continue to slip next year, says the USDA’s Economic Research Service (ERS). It agrees with what many market watchers have been saying for months: “Slightly more milk and weakening global demand (will) combine for a lower price forecast next year.”

ERS economist write, in their monthly “Livestock, Dairy and Poultry Outlook” report, that they expect the nation’s Class III milk price to average $14.50 to $15.30 in 2009. A month ago they expected it to average $14.75 to $15.65.

They now expect the Class IV price to take a steep slide, to average $10.75 to $11.65 per hundredweight. In November they looked for the 2009 Class IV price to average $11.50 to $12.50.

The economists go on to forecast a U.S. “all-milk” price ranging between $14.95 and $15.75. A month ago they thought it would average $14.75 to $15.65 for 2009.

Those forecasts are all lower than what the ERS said it expected in the report it issued in November.

Meanwhile, ERS forecasts for where 2008 milk prices will wind up averaging are steady to slightly higher in the December report, compared to a month earlier. Now the ERS says to expect 2008’s Class III price to end up averaging $17.40 to $17.50 per hundredweight. That’s steady to a little higher than the expectation a month ago.

This year’s Class IV price will probably finish up averaging $14.55 to $14.95, or steady to a bit higher than in November. And the 2008 all-milk price is calculated to end up averaging $18.30 to $18.40, the same numbers the ERS put forth a month ago.

Double-whammy

What’s behind these lower numbers? A double-whammy of more milk and less demand.

“Milk production will inch upward in 2009 as lower feed prices help boost yields. However, softening exports, combined with the slightly higher milk production, will push prices downward in 2009. Domestic use is forecast to rise slightly despite overall economic weakness,” says the ERS.

Even though demand for dairy product in the U.S. is expected to increase, that won’t offset the impact of lessening demand in foreign markets, says the ERS. As a result, “milk and dairy product prices will continue to glide downward throughout much of 2009.”

These falling milk prices have already changed the milk: feed ratio. For 2009, the ratio is expected to settle in at around 1.9.

“A ratio in this range suggests continued pressure for contraction,” according to the ERS economists.

Cow numbers, meanwhile, are forecast to decline slightly, to 9.245 million. But the ERS says it expects milk per cow to climb by about 1 percent next year. That rise would bring average per-cow production up to 20,700 pounds.

Even so, the ERS points out that an increase of this sort would be “well below trend.” A 1 percent milk production increase would nudge U.S. annual output up to 191.4 billion pounds.

Lower milk prices will be somewhat offset by lower feed prices. The ERS expects feed costs to keep dropping during 2009, but it says they, nevertheless, will offer “little relief.”

The outlook reports cites the USDA as forecasting corn prices next year to average somewhere between $3.65 and $4.35 a bushel. The USDA also expects soybean meal to average $240 to $300 a ton.

September strong

As of this past September, the warnings of softening demand had not been supported by the numbers. The ERS says commercial disappearance of dairy products, on a milk equivalent fat basis, was up 2.7 percent from a year earlier.

“Butter had the largest upturn on a percentage basis,” according to the ERS. “…Production continues to outpace last year’s for the major products. Commercial use on a fats basis is expected to climb in 2009 by about two percent, which is about trend.”

Regardless, the report expects dairy product prices to come down as milk prices come down. It all boils down to “softening export sales.”

“Global dairy demand has been weakened by recession, and supplies of products from the United States, the European Union and the Oceania countries (Australia and New Zealand) remain ample,” notes the ERS.

U.S. cheese exports fell for the second month in a row during October. Cheese exports as a percentage of U.S. cheese production dropped to 2.5 percent. That’s the lowest share so far this year. Also hurting U.S. dairy processors is the stronger dollar, which makes U.S. goods more expensive.

The export market looks to be especially weak for dry dairy products, says the ERS.

“Exports, on a skim solids basis, are forecast at 23.5 billion pounds, the lowest since 2005. On a fats basis, exports are forecast to slide to 6.7 billion pounds, well below 2008’s projected 9.1 billion-pound total,” the report says.

Butter exports have been holding steady, though at low levels. However, since August they are down about 25 percent.

Exports of nonfat dry milk have fallen to their lowest amount of the year. They’re close to being at a record low in terms of percentage of production.

Product prices off

“Weaker exports next year, along with slightly higher milk production, will soften prices across all products and milk classes,” the ERS summarizes. “Prices for the major dairy products have trended downward through November.”

For next year, expect these kinds of average dairy product prices, says the ERS: Commodity cheese - $1.655 to $1.735 per pound; butter - $1.265 to $1.375; nonfat dry milk n 87.5 to 93.5 cents per pound; and dry whey n 19 to 22 cents per pound.

If those prices do materialize, cheese prices would be off 15.5 to 24.5 cents per pound from their 2008 average. Butter prices would be down 4.5 to 18.5 cents per pound from this year’s average.

For nonfat dry milk, the price difference between this year and next would amount to 28 to 36 cents per pound. And for dry whey, the yearly average price difference would range from half a cent to 5.5 cents per pound.

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