several blocks of cheese
GOT MILK: The U.S. is the only major exporter experiencing higher milk production.

Strong butter and cheese sales are boosting milk prices

Dairy Outlook: Class III futures are averaging $17.52 for the year.

“Milk prices ended the year much improved over prices during the first half of the year,” says Bob Cropp, University of Wisconsin dairy economist. Class III averaged just $13.48 for the first half of 2016, but improved to $16.25 for the second half. Class III was $16.76 for November and $17.40 for December, the high for the year.

According to USDA, the Class III price has improved, with CME butter prices above $2 per pound since mid-December, higher cheese prices and higher dry whey prices. On the CME, 40-pound block cheddar averaged $1.73 in December, and cheddar barrels averaged $1.61. Butter was above $2 per pound in December and January.

Strong exports
“Good sales of butter and cheese and improved exports held up prices,” Cropp says. “Compared to a year ago, November exports were up 10% for cheese, 131% for butterfat, 32% for nonfat dry milk and skim milk powder, and 47% for whey products.”

The volume of November exports was the highest in 18 months and, on a total solids basis, was equivalent to 15.8% of U.S. milk production, according to USDA.

Forecasts are for improved milk prices in 2017. USDA is forecasting the average number of milk cows to increase 0.4% and milk per cow to increase 1.8%, resulting in 2.2% more milk to be produced.

“With that relatively strong production increase, how much milk prices increase will depend upon continued good butter and cheese sales and continued growth in dairy exports,” Cropp explains. “Continued growth in the economy and improved consumer confidence spells well for good sales.”

Milk production for four of the major exporters — European Union, New Zealand, Australia and Argentina — is expected to be lower than a year ago and is not expected to show increases any time before the second half of the year, notes Cropp. The U.S. is the only major exporter experiencing higher milk production. World demand is also improving, with more activity from China and Southeast Asia. 

“The world supply and demand is slowly tightening, and world dairy product prices are increasing,” Cropp says. “These are favorable factors for growth in U.S. dairy exports.”

USDA’s milk production report estimated December milk production to be 2.2% higher from a year ago, the results of 0.4% more cows and 1.8% more milk per cow. This brings total milk production for the year to 212.5 billion pounds, 1.9% more than 2015. The increase in milk production was driven primarily by more milk per cow, which was 1.7% higher than 2015. The average number of milk cows was just 0.2% higher than 2015.

“Butter has fallen from its January high of $2.30 per pound to $2.21 and is expected to fall some more,” Cropp says. CME 40-pound block cheddar started January at $1.67 per pound, peaked at $1.75, but has fallen to $1.64. Cheddar barrels started January at about $1.60 per pound, peaked at $1.70 and have fallen to $1.48. Dry whey prices continue to strengthen, trading as high as 48 cents per pound, giving support to the Class III price.

“The January Class III price should be about $16.50,” Cropp says. “Class III should stay in the $16s through May or June and then move into the $17s for the remainder of the year. The Class III price could average more than $2 higher than 2016.”

Any changes in expected milk production, sales or exports could result in quite different prices, Cropp cautions.

“Dairy producers may want to use some price risk management tools to take advantage of relatively high Class III futures. Currently, Class III futures are averaging $17.52 for the year.”

 

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