Slowing economy, increased production drives milk prices lower

Bob Cropp
A host of factors including inflation, dampening domestic demand are weakening milk prices.

Milk prices are moving lower. The Class III price peaked in May at $25.21, fell to $22.52 by July and August will be around $20. The Class IV price topped out in June at $25.83, declined to $25.79 in July and August will be around $24.70.

Slightly higher milk production and inflation and a slowing economy dampening domestic demand are factors for the decline. Milk production which was 0.9% below a year ago January through May was just 0.1% lower in June with a 0.2% increase in July. Inflation and a slower economy have reduced restaurant traffic softening cheese and butter sales.

Cheese, whey prices lower Class III

Dairy product prices weakened the last half of July going into August with some strengthening since then. Both lower cheese and whey prices lowered the Class III price. The 40-pound cheddar block price averaged above $2 per pound March through July with a high of $2.3399 for April. The block price started August at $1.7850 per pound, moved up and down since with today at $1.82.

Cheddar barrels also average above $2 per pound March through July with a high of $2.3567 for May. Barrels started August at $1.7959, moved up and down since with today at $1.8950.

The dry whey price averaged $0.5373 per pound for May, declined to $0.4694 for July and has been $0.44 to $0.45 since then.

Butter holds up Class IV price

Higher butter prices offset some of lower nonfat dry milk prices to hold up the Class IV price. Butter averaged $2.9546 per pound for June and $2.95 in July. Butter got as high as $3.06 per pound early August, declined to $2.9350 but this week was $3.02.

Nonfat dry milk averaged $1.8286 per pound for June and decline to $1.6984 for July and today is $1.5325. With milk production declining seasonally and good holiday butter and cheese sales, butter and cheese prices could rally some, pushing up both the Class III and IV price in October and November.

Butter stocks are tight. July 31 stocks were 21% below a year ago and had declined 5% since June. July 31 cheese stocks, however, were 5% higher than a year ago and had increased 1% from June.

Dairy export support milk prices

Higher dairy exports have supported milk prices. June exports on a volume basis were 9% higher than last year and on to set a new record with the January through June volume 17% higher. June cheese exports were up 23% and butter 63%.

Lower milk production in Western Europe, New Zealand and Australia and U.S. prices competitive on the world market were key factors for the increase.

Milk price outlook

Milk prices are likely to average lower in 2023. The level of milk production, domestic sales and dairy exports will determine how much lower. With last year’s milk production below a year ago, milk production for the remainder of this year will run higher and into next year.

The 0.2% increase in July milk production was the net result of 67,000 fewer milk cows, down 0.7% and 0.9% more per cow. Milk cow numbers increased each month January through May but declined by 4,000 in June with a 1,000 increase in July.

Of the 24 reporting states just 10 had more milk cows than a year ago led by 25,000 more in Texas and 20,000 more in South Dakota. Milk production compared to a year ago for the five top states was: +2.2% for California with 4,000 more cows, Wisconsin -0.3% with 6,000 fewer cows, Idaho +1.5% with 2,000 more cows, Texas 6.0%, and New York no change with 7,000 fewer cows. South Dakota led all states with an increase in milk production of 13.1%.

Input costs keep production in check 

High feed prices and other input costs, increased cost of building materials, labor shortages and fewer dairy replacements will hold down the increase in milk production next year. USDA forecasts a 1.1% increase in milk production from an average herd size of 15,000 more cows or a 0.2% increase and 1.0% increase in milk per cow.

This level milk production would be supportive of milk prices. Uncertainty exists as to economy and the level of inflation as both can impact domestic demand. Dairy exports are forecasted to increase next year, Milk production is expected to show no growth or very limited growth in Western Europe with some possible improvement in New Zealand leaving open export opportunities for the U.S.

U.S prices should remain competitive on the world market. There is uncertainty whether the world economy will slow and impact exports to China. While milk prices are likely to be lower next year, prices should stay relatively strong. Dairy futures could be a little optimistic.

Currently Class III futures start the year in the $20’s and holding in the $19’s the rest of the year. Class IV futures are in the $20’s to September then in the $19’s. USDA is also optimistic. Their forecast is for an average Class III of $21.60 this year compared to $17.08 in 2021 and an average of $19.70 next year. Class IV is forecasted to average $23.95 this year compared to $16.09 in 2021 and $20.35 next year.

But a lot can change as we move through next year.

Bob Cropp

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