Upper $18's for Class III will not materialize

Bob Cropp
From milk cans to tankers picking up farm milk. What next?

What was earlier predicted for Class III milk prices in the high $18’s for both November and December will not materialize.

Milk cow numbers were on a decline since May and total milk production was up just 0.6% for August and 0.2% for September. As a result, cheese prices had shown real strength during October. From the beginning to the end of October 40-pound cheddar cheese blocks increased 27 cents per pound and cheddar barrels 24 cents.

But cheese prices have weakened since then. The 40-pound block price had fallen to $1.675 per pound the start of November, rallied to $1.81 but fell sharply thereafter to $1.66, but did increase today to $1.73. Barrels started the month at $1.7525 per pound but have fallen to $1.4550.

Part of the weakness in cheese prices was due to the September stock report which showed cheese stocks increasing rather than normally decreasing August to September with September stocks 7.7% higher than a year ago.

Dry whey was $0.645 per pound the start of the month and is now $0.700 giving strength to the Class III price. We can now expect the November Class III price to be about $17.95, and if cheese prices do not rebound some December about $17.30.

Class IV price fares better from butter, nonfat dry milk prices

Unlike the Class III price the Class IV price has strengthened due to higher butter and nonfat dry milk prices. Butter started November at $1.98 per pound, did fall to $1.935 but is now $2.0375.

Nonfat dry milk has been in the $1.55 to $1.57 per pound range. The Class IV price will be higher than the Class III price. For October, the Class IV price was $17.04 but should be about $18.65 for November and possibly reaching $19 by December.

Forecasting with certainty difficult

Forecasting milk prices far into next year with a high level of certainty is difficult. Milk prices are very sensitive to small or anticipated changes in milk production, domestic sales, or dairy exports.

Milk production looks to be bullish for milk prices. October milk production fell 0.5% below a year ago. Milk cow numbers fell 14,000 head below a year ago. Since May milk cow numbers have fallen by 107,000 head. For the third straight month milk per cow was below a year ago with October 0.3% below.

Compared to year ago October milk production for the top five states was: California -1.3%, Wisconsin +2.7%, Idaho +0.9%, New York +1.0% and Texas +3.9%. South Dakota continues to lead all states in production increase being up 15.3%. Indiana has been experiencing relatively strong milk production this year with more milk cows. But, for October Indiana had 5,000 fewer cows than a year ago and milk production was 2.9% lower.

Other states with relatively big declines in milk production were New Mexico 12.2%, Florida 4.7%, and Arizona 3.8%. Michigan which this year has had relatively strong increase in milk production experienced a 0.4% decline all due to lower milk per cow.

Dairy exports remain bright spot

Domestic sales of cheese and butter have been positive for milk prices. But high inflation driving up the price of most everything including food, the price of gas and the cost to heat homes this winter is reducing consumer spending power.

Consumers may cut back on eating in restaurants and buying cheese in stores. This could dampen dairy sales particularly cheese sales.

Dairy exports have been a bright spot for milk prices. September saw the eight straight month of growth in dairy exports. September export volume was 14% higher than a year ago.

Compared to a year ago exports of nonfat dry milk/skim milk powder were up 16.2%, dry whey products 5.1%, cheese 20.5%, and butterfat 223.4%. Dairy exports are forecasted to increase next year.

World dairy product prices have been increasing. U.S. prices of nonfat dry milk/skim milk power, cheese and butter remain competitive on the world market. Milk production in major exporters is not increasing to produce more dairy products for export.

Western Europe dairy producers face higher feed costs and milk production has been up just slightly from a year ago. Milk production in New Zealand has been below year go levels. Exports to Mexico are running well above a year ago. Exports to China have also been higher. Exports of whey products to China, the largest U.S. export market for whey have added strength to the Class III price.

A year ago, dry whey was in the $0.40’s per pound. Now dry whey has been in the high $0.60’s. This has added about $1.50 to the Class III price. Whey exports to China may slow some next year as China hog producers are experiencing lower prices. Since over half of dry whey is exported dry whey prices are very sensitive to export volume. For example, if dry whey prices were to drop back to $0.50 per pound the Class III price would be lower by about $0.90.

Rising input costs may dampen pricing outlook

With much higher feed cost, labor cost and the cost of all other inputs milk production next year may increase by no more than 1%.

Milk cow numbers are likely to continue to decline at least for the first half of the year. USDA has forecasted milk cow numbers to average 60,000 head fewer next year, a decline of 0.6%. USDA also forecasts milk per cow to increase by 1.4% resulting in total milk production up just 0.8% from this year.

That level of milk production would support favorable milk prices next year. It would take lower than expected domestic milk sales, lower than expected dairy exports or a combination of the two to result in relatively unfavorable milk prices.

USDA forecasts Class III to average $17.75 next year compared to $16.95 this year. Due to stronger butter and nonfat dry milk prices USDA forecasts Class IV to average higher than Class III with an average of $18.70 next year compared to $16.00 this year.

Current Class III futures are more optimistic being in the $18’s February through December. Class IV futures are in the high $18’s and reaching the $19’s for some months of next year. If milk production does turn out as low as what is being forecasted, there is a strong probability that Class III could average better than what USDA is forecasting.

Bob Cropp

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