Milk Production Growth Slows - What's Up for Milk Prices?

As we pass the midpoint of the 2003 calendar year, it is time to take stock of where we are milk price-wise and where we are likely to go in the next 17 months. In this column, I will review the August 2003 USDA Milk Production Report, look at the relationship of butter and cheese inventories to high and low milk prices, and finally stick my neck out and provide a forecast for the remainder of 2003 and for 2004.

August 2003 USDA milk production report disappoints the market

Over the last 10 trading days the Chicago Mercantile Exchange (CME) cash cheese market has idled time away with not nary an up-tick nor a down-tick in either the block or barrel price. Why? The market has been eagerly awaiting the release of the USDA Milk Production Report for a read of the July production numbers. With it would come one of two possibilities: 1) the current run-up in the cheese price on the CME is only the beginning of a sustained period of higher cheese prices and hence, higher milk prices, or 2) the lack of momentum over the last two weeks in the CME cheese market is an indication that the run-up has made its course and this is about as high as it will go.

Well, the report is out and it is now old news. The much anticipated 1.5 to 2.0% drop in July milk production in California was not evident, with CA milk production off only -0.6% from July 2002. This was based on a reported increase in cow numbers and flat production per cow over the upward revised June 2003 USDA numbers.

Despite the heat, Idaho turned in an 8% increase in production over July 2002. This was accomplished with slightly fewer cows and a stunning 40-pound per cow increase in productivity over last month's numbers. Texas turned in a 7.2% milk production increase and New Mexico managed a 3.5% increase.

Here in the lake states, Wisconsin milk production was up 2.9% and Minnesota up 0.7%. Ohio turned in a respectable 3.3% increase in milk production and Michigan 4.4%, while New York (-2.4%) and Pennsylvania (-4.4%) lost ground. The southeastern states continue to slide with Florida losing 7.5%, Kentucky 8.7%, and Virginia 9.2% over July 2002.

The numbers coming out of this report do not lend significant strength to the current CME cash cheese market. However, much of the damage from the heat in the west may not be observed until the August numbers are released in the September report. Others I have talked to expressed the view that the cheese market continues to be tight in the west and this will only be exacerbated by the resumption of the schools across the country. Overall, I expect that this report will not substantially deflate the current futures market for the coming months but will certainly not push it higher. If you are not paying attention to the prices offered on the CME Class III contract, you certainly should be or perhaps you have a rich uncle.

Continuing good news on dairy cow slaughter

The latest weekly numbers from the U.S.D.A. Federal Inspected Livestock Slaughter - Dairy Cattle report indicates that dairy cow slaughter continues to run ahead of last year at this time.

Let's look at what is ahead for market prices

Until we get a better balance between the inventory of dairy products and commercial disappearance, you should look for the current wholesale price levels of Grade AA butter and Cheddar cheese to remain lethargic for the remainder of 2003. The 2003 forecast, June through December, for dairy commodity prices (butter, nonfat dry milk, cheese, and whey), given by quarter, is shown in Table 1. These forecast prices translate into the average milk check value shown in Table 2. The producer differential and the gross milk check price are applicable to producers in the Mideast Federal Milk Marketing Order 33, Cleveland base zone.

Table 1. Forecast dairy commodity wholesale prices ($/lb).

Forecast for Planning Year
Grade AA Butter
Nonfat Dry Milk
Cheddar Cheese
Whey Protein
2002 Annual Average
2003 Quarter I
2003 Quarter II est.
2003 Quarter III est.
2003 Quarter IV est.
2003 Annual Average Forecast

Table 2. Forecast dairy commodity wholesale prices ($/LB).

Forecast for Planning Year
Grade AA Butter
Nonfat Dry Milk
Cheddar Cheese
Whey Protein
2004 Quarter I forecast
2004 Quarter II forecast
2004 Quarter III forecast
2004 Quarter IV forecast
2004 Annual Average Forecast

Component pay prices

Milk component pay prices, given the forecast 2003 dairy product prices, will be quite moderate, which will be good news for processors of dairy products facing weak consumer demand and not so good news for dairy producers. Tables 3 and 4 list my 2003-2004 component pay prices. With the rapid rise in the cheese price, we have seen the producer price differential turn negative. This happens because the rise in the cheese price pushes the Class III price for July above the Class I price, and it does not pay for Class III users to pool on the Federal Order. By not pooling, Class III utilization drops dramatically (this is the class that is not pooled) and Class I reported use climbs dramatically. The result is that the Producer Price Differential (PPD) calculation turns in a negative amount. For July, this was -10 cents. October should return to a more normal value for the PPD.

Table 3. Forecast milk component pay prices and Class III price for 2003.


Grade AA Milk Fat

Other Solids
Nonfat Solids
Class III
MILC Payment*
2002 Annual Average
Forecast for 2003
Quarter I
Quarter II est.
Quarter III est.
Quarter IV est.
Annual Average

*MILC = Milk Income Loss Compensation

Table 4. Forecast milk component pay prices and Class III price for 2004.


Grade AA Milk Fat

Other Solids
Nonfat Solids
Class III
MILC Payment*
Forecast for 2004
Quarter I forecast
Quarter II forecast
Quarter III forecast
Quarter IV forecast
Annual Average

*MILC = Milk Income Loss Compensation

A look ahead at class prices

Table 5 lists my 2003-2004 forecasts for Federal Order 33 and a comparison to the 1999 - 2002 prices. For annual averages in 2003, I have Federal Order 33 Class I milk at $12.35/cwt; Class II at $10.70/cwt; Class III at $10.21/cwt; and Class IV at $9.93/cwt.

Table 5. Forecast class prices 2003 with comparisons for 1999 through 2002.

Calendar Year
Class I
Class II
Class III
Class IV
2003 (estimated)
2004 (estimated)

Projected Milk Income Loss Compensation (MILC) payment rates

Now that we have the complete suite of price forecasts for Fiscal Year (FY) 2003, we can calculate the implied payment rates under the MILC program. In doing this, keep in mind that these are only estimates of the actual rates and will change as new market and production information becomes available. The actual and projected FY2003 rates and the forecast rates for FY2004 are shown in Table 6. Remember MILC payment rates decline as the Class III and/or Class IV advanced mover prices increase. The notable point here is the September 2003 payment rate. If the announced National Agricultural Statistics Service advanced cheddar price approaches the $1.55/LB mark, the MILC payment will approach zero as the Class I mover will exceed $13.69/cwt, given my forecasts at that cheese price point. A higher MILC payment rate is not what is desired as it lifts only some boats, while across the board strength in all milk prices raises all of the dairy boats.

Table 6. The FY2003 forecast Milk Income Loss Compensation (MILC) payment rate ($/cwt) by month.

FY2003 MILC Payment Rate (Actual **)
FY2004 MILC Payment Rate (Forecast)
Oct '02 / '03
$1.5930 **
$1.3905 **
$1.3950 **
Jan '03 / '04
$1.4085 **
$1.557 **
$1.746 **
$1.8225 **
$1.791 **
$1.7775 **
$1.7640 **