Higher feed costs driving tighter margins for dairy producers

Bob Cropp
With higher feed costs driving tighter margins dairy producers are likely further reduce cow numbers and milk per cow maybe dampened some.

USDA’s milk production report estimated August milk production to be 1.1% higher than a year ago. This is the first time the growth in milk production has been below 2% since March.

Milk cow numbers have declined for three consecutive months. August cow numbers declined 19,000 from July and 29,000 from May. The number of cows was still 1.1% higher than a year ago. Just nine of the 24 reporting states had fewer milk cows than a year ago with the largest reductions in New Mexico down 15,000 head and Washington down 10,000 head.

Adverse weather impacted milk per cow with no increase over a year ago. Ten of the 24 states had milk per cow lower than a year ago.

The increase in milk production was lower than recent months in each of the five leading dairy states. Milk production was up 0.7% for California, 2.6% for Wisconsin, 1.1% for Idaho, 0.3% for New York and 3.2% for Texas. South Dakota led all states in increased milk production, up 16.2% from 22,000 more cows and higher milk per cow.

Seven of the 24 had less milk production than a year ago and all seven had fewer milk cows. Milk production was 0.5% lower in Arizona, 4.0% lower in Florida, 1.4% lower in Illinois, 9.3% lower in New Mexico, 0.9% lower in Vermont, 2.5% lower in Virgin and 6.6% lower in Washington.

Milk production may continue decline

The monthly increase in milk production from the prior year is likely to continue to decline for the remainder of the year and going into next year. Dairy producers are experiencing tight margins with higher feed costs.

Severe drought particularly in the West has reduced forage supplies and driven prices higher. Corn and soybean meal prices are much higher than a year ago. With higher feed costs driving tighter margins dairy producers are likely further reduce cow numbers and milk per cow maybe dampened some.

Thus far this month compared to August the price of butter has averaged 11 cents per pound higher, nonfat dry milk 8 cents higher, barrel cheese 5 cents higher, 40-pound cheddar blocks 4 cents higher and dry whey unchanged. With higher dairy product prices, the September Class III price will average about $16.60 compared to $15.95 for August and Class IV about $16.50 compared to $15.92 for August.

Milk price forecast

What can we expect for milk prices for the remainder of the year? Butter and cheese prices normally increase as does milk prices September through November. Milk production is seasonally lower late summer, schools open increasing beverage milk sales and dairy product buyers increase purchases of butter and cheese to build stock levels for the strong seasonal demand thanksgiving through Christmas.

We can expect price increases this year, but the increase maybe dampened by increased cheese production, relatively high stock levels and possibly some set back in food service if the surge in cases of the Delta virus and mask mandates make consumers more reluctant to eating out and attending public events.

The latest dairy product report showed July production of American cheese up 2.3% from a year ago and total cheese production up 3.5%. July 31st stock levels show American cheese stocks up 4.2% from a year ago and total cheese stocks up 4.1%.

Despite some possible impact of Delta virus, cheese sales should remain strong and higher than a year ago. With more eating out rather than home prepared meals beverage milk sales have been running below a year ago. Beverage milk sales for July were 6.3% lower than a year ago with year-to-date sales 5.3% lower.  Butter sales may also not be as high as butter sales were strong a year ago with more home prepared meals.

Dairy exports positive factor for milk prices

Dairy exports have been a positive factor for milk prices and is expected to continue for the remainder of the year. U.S. dairy product prices remain price competitive to other major exporters. Milk production amongst other major exporters is expected to be no more than 1% higher than a year ago. July U.S. export volume on a milk solids equivalent basis was 7% higher than a year ago, the sixth straight monthly increase. Increased exports to China and Mexico lead the way.

Nonfat dry milk/skim milk powder exports were 3.1% lower due to reduced sales to Southeast Asia which may be partially explained by continued congestion at California ports. But whey product exports were up 17.8%, cheese exports up 26.8%, and butterfat exports up 86.1%.

As of now, it seems reasonable that Class III could be something like $16.60 for September, $17.25 for October and peaking around $17.60 for November and falling back to $17.40 for December. Current Class III futures are not this high being in the low $17’s October through December. Class IV could be in the high $16’s to low $17’s September through December. If milk production slows down more than expected and domestic sales are higher along with strong exports prices could end up higher.

Bob Cropp

Cropp is Professor Emeritus at the University of Wisconsin Cooperative Extension, University of Wisconsin-Madison.