Dairy Market Outlook: January - February 2011

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

The USDA Milk Production report, released December 18, 2010, shows continued strength in milk production across the country.  For November, the 23 state production was up 3.1% over last year and the U.S. total was up 2.7%.  This is the sixth straight month that the 23 state total is up 2.7% or better.

Gains in milk production are coming from the western and some eastern states.  Arizona production was up +8.7%, Oregon up +8.4%, Idaho up 7.2%, Washington up +6.0%, and California showing a 4.5% growth. Out east, New York added 4.6% and Pennsylvania upped production by 3.2% vs. last year.  Midwestern states did not fare as well with Iowa down 3.3%, Minnesota down 1.5% and Wisconsin up marginally 0.5% for November versus last year.

Milk output per cow continues to be a major contributor to these production gains, but it is getting harder to maintain these gains as milk prices sink and feed prices rise.  The USDA released its December Livestock, Dairy and Poultry (LDP) Report, December 20, 2010.  The 2011 outlook for U.S. dairy is for a slight increase in milk production, up 1.4%, a slight reduction in imports due to international prices exceeding U.S. prices, and a decline in U.S. exports, from 8.3 billion pounds in 2010 to 6.3 billion pounds in 2011.

With the anticipation of weaker milk prices, the Chicago Mercantile Exchange (CME) 12-month Class 3 average for 2011 is right at $14.50/cwt, the real profit killer will be the USDA forecast for feed prices.  According to the USDA LDP report, corn is expected to be in the $4.80 to $5.60/bu range for the 2010/11 crop year and soybean meal in the $310 to $350/ton range.  Higher feed prices, coupled with a reduced milk price, the current near-term 6-month CME Class 3 price average is $14.00/cwt, will put the squeeze on dairy margins in the coming months.  The impact will become evident by mid-2011.  The CME Class 3 has this priced in with the out-6 months of 2011 averaging a dollar higher at $15.03/cwt.

If you have not explored the use of the Livestock Gross Margin (LGM) insurance product, this may be the time to take a careful look at this product and determine whether or not it will work for your dairy operation.  If you looked at it earlier, you may take a new look as there are a couple of important changes which are just now going into effect.  You can find detailed information at the University of Wisconsin website: http://future.aae.wisc.edu/lgm_dairy.html. At this site, you will find a web-based program which will allow you to test out the LGM using your numbers.  Here in Ohio, you can also attend one of the up-coming OSU Extension workshops, to be held in mid February 2011 on this topic.  Contact the OSUE Wayne County agricultural educator, Dianne Shoemaker (shoemaker.3@osu.edu) at the Wayne County OSU Extension office, for more details on these workshops.