MarketView...U.S. Dairy Outlook Brief May through July 2010

Dr. Cameron Thraen, Extension Specialist, The Ohio State University

In this installment of The MarketView, I will take stock of the current milk production situation in Ohio and contrast this with the U.S. dairy situation. At the end of this piece, I will explore how this translates into the outlook for market price.

Milk Cows and Cow Productivity: Ohio

In the first two charts, Chart 1 and Chart 2, you will see the number of milk cows in Ohio (Chart 1) and the yield per cow (Chart 2). Yields and production data are each adjusted to reflect a 30 day month.

Chart 1

Cows in milk peaked in Ohio back in May through July 2008 at 282 thousand head. Looking at Chart 1, you can see two adjustment periods. The first period, beginning with August 2008 and ending December 2008, milk cows moved down 6000 head. The second period occurred in late 2009. In fact, milk cows increased marginally from May to September 2009 before starting down in earnest. This was due no doubt to the influence of the Milk Income Loss Contrast (MILC) payments and a short lived resurgence in milk price during this period. This promoted an atmosphere of optimism that holding on just a bit longer might pay off. Dairy cow herd expansion began in May 2010. The latest July numbers from the USDA put the Ohio dairy herd at 270,000 head.

Chart 2

Chart 2 shows the productivity on Ohio dairy farms. During the 2008 through April 2010 period, milk per cow per day increased by 6 lb (13%). During the financial calamity that was 2009, productivity on Ohio dairy farms actually increased from a low of 48 to 53 lb/cow/day. The latest run shows productivity increasing sharply over the January through April 2010 period. Milk output has increased from 50 to 56 lb/cow/day. This is a result of Ohio dairy producers culling low producing cows from the State herd. Removing these low producers while shrinking the whole herd raises the average milk cow output. Difficult weather, heat, and humidity is evident in the decline for June and July 2010.

Milk Cows and Cow Productivity: United States

In the second two charts, Chart 3 and Chart 4, you will find the number of milk cows, United States, (Chart 3) and the U.S. yield per cow (Chart 4).

Chart 3

The national dairy herd peaked during the April 2008 through January 2009 period at just over 9.3 million head. With the collapse of the milk price in February 2009, dairy producers began a more aggressive culling of low producing cows. The Cooperatives Working Together (CWT) program also began an aggressive campaign to use its farmer paid funds to remove dairy cows. This culminated in the dramatic slide in cow numbers nationally (see MarketView, BDN March edition for a detailed look at this culling activity). From a peak of 9.334 million head, December 2008 to a low of 9.082 million head in December 2009, the national dairy herd declined 2.7%. With better milk prices and lower input prices, this slide ended in January 2010, and over the first four months of this year, the dairy producers have added back 14,000 dairy cows. This trend continues into July 2010.

Chart 4

The productivity pattern for the national dairy herd is very similar to that experienced in Ohio. The latest numbers show milk productivity as increasing rather sharply from 55 to 60 lb/cow/day and then declining as the heat and humidity impacted productivity.

Annual Milk Production, Ohio and the United States

Charts 5 and 6 show the annual production levels for Ohio and the United States. Each monthly production level shows the 12 month rolling average, or the total production for the past 12 months. Looking at Chart 5, we can see that milk production in Ohio showed only a slight deviation from its trend during 2009. Milk production capacity is now slightly above 5.2 billion annually. Looking at the 12 month rolling average for the United States, Chart 6, we can see that the very significant trend in U.S. productive capacity for 2008 came to a halt in 2009, dropping back for most of the year, and then declining over the last four months of 2009. With stronger milk prices in the early months of 2010, increasing cow numbers and milk productivity, milk production capacity is on the upswing, but still below the 2008 peak.

Chart 5

Chart 6

Ohio Share of U.S. Milk Production

The final chart in the overview of Ohio and U.S. milk productive capacity is Chart 7. This chart shows the Ohio share of total milk production over the past two plus years. The message is clear. Ohio is increasing its share of milk production relative to the rest of the United States. This share has increased from a low of 2.67% in early 2008 to 2.74% as of July 2010.

Chart 7

Milk Production Capacity and the Class 3 Price

Chart 8

Chart 8 shows the relationship between the rate of change in the U.S. capacity to produce and market milk and the Class 3 milk price. I have used this chart in past Marketview articles to reinforce the point that rates of growth in our milk production capacity, which exceeds 2% per year, is accompanied by Class 3 milk price below $15/cwt. The only exception to this occurred at the peak of the world speculative housing bubble, 2007 and early 2008. This was an anomalous time period, when all commodity markets, including dairy commodity markets, were off the chart on the demand side. Looking at Chart 8, and setting aside this anomalous 2007-2008 period, high milk prices are created by negative annualized growth rates, as with 2004, or with annualized grow rates sustained below 2% per year, as with July 2006 through June 2007. We are currently increasing U.S. milk production in excess of what commercial demand will take and still yield Class 3 price above $15/cwt.

Current Market Price Outlook

Chart 9

The current Chicago Mercantile Exchange (CME) Class 3 milk futures price is shown in Chart 9, along with the median Class 3 price and the upper and lower quartile bounds. As of August 18, 2010, the August 2010 futures price is $15.10/cwt. The median price for August 2000-2009 is $13.70/cwt. The CME Class 3 price pattern shows prices above the long-term median price through October 2010 and then increasing significantly above the long-term median for the months of November 2010 through July 2011. Why the dramatic increase in the latter part of the coming 12 months? The answer is one of two views. Either there will be a renewed culling beginning in earnest at the end of the summer due to continued financial pressure on the nation’s dairy farms, including the impact of the latest CWT cow purchase program, or the market is anticipating a resurgence in domestic and more importantly international demand toward the end of 2010 and into 2011. Or possibly a combination of these two events. What will take place? I do not know. What I think you can take from this edition of the MarketNews, is that the growing milk production capacity in the United States suggests that milk prices will remain below the $15.00/cwt mark over the summer. If a resurgence of international demand does come about toward the end of 2010, the Class 3 price may be in the upper $14/cwt range. As a planning price, for those shipping milk in Ohio and the Mideast Federal Milk Marketing Order, I would suggest using a Class 3 price of $14.80/cwt and add another $1.00 to get a blend price of $15.80/cwt.

This would be a good time to learn more about the use of futures and options to protect your milk price should a pricing opportunity arise in the coming weeks or months. Also consider learning more about the Livestock Gross Margin (LGM) Insurance product available to dairy producers. A number of important changes to the LGM-Dairy program will go into effect in September or October. These changes will make the insurance product less expensive and easier to purchase. Each of these provide a management tool to which can assist in you in protecting your milk price in 2010 and 2011. You can find out more about this by visiting my website: Look for the links to Livestock Gross Margin Insurance or Price Risk Management.