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Prices drop with more milk, dairy products available
By Lee Mielke

The increased milk supply has increased dairy product production and has sent prices sharply lower. USDA’s latest Dairy Products report pegged January butter production at 145.5 million pounds, up 19.3 million pounds from December and 16.8 million above a year ago. Nonfat dry milk production totaled 102.4 million pounds, down 0.7 percent from December, but 9.2 percent above a year ago.

American-type cheese output totaled 317.3 million pounds, down 7.7 million from December, and 4.9 million below a year ago. Total cheese hit 764.3 million pounds, down 27 million from December, but 9.6 million above a year ago.

Cheddar production in Wisconsin was down 1.2 percent from a year ago and down 9.6 percent in California. California butter production was up 26.2 percent from a year ago, while Wisconsin butter manufacturing was up 13 percent.

The Dairy Products Report shows that the extra milk production is going to butter/powder plants, according to Jim Tillison, of the Alliance of Western Milk Producers, as both showed sharp increases.

When asked why the CWT program didn’t prevent the build up in milk production, Tillison replied, “Farmers are very good at what they do and, when you give them the period of time that the CWT has given them with good milk prices, this was bound to occur.”

He said it’s an unfortunate situation, but when production increases nationally at close to 4 percent, “a day of reckoning eventually comes.”

The last CWT herd removal took out the most cows ever, he said, more than 64,000, and yet, “it had almost no impact on cow numbers in the long run” and he pointed to the good milk prices as reason for not culling cows. He predicted that, with prices heading down, “we’ll see some culling of cows that probably should have occurred several months ago.”

The CWT committee agreed this week to double the program’s five-cent per hundredweight assessment, beginning July 1, 2006 through 2007. National Milk’s Chris Galen reported in his update that they realized that the CWT was “Not going to be effective in 2006 at the current assessment level.”

He said that the committee is confident that the increase will be “an easier sell” than the original program was three years ago because “Back then it was untried and was completely new.” The program now has “a track record,” according to Galen, and “We can demonstrate a positive return on investment to farmers.”

Regional safeguard levels limiting how much milk can be removed from a particular region were also raised from .5 of 1 percent to .75 of 1 percent of the annual milk production in the Northeast, Southeast, and Midwest. Galen said that will “give us the ability to take out a little bit more milk from those parts of the country, primarily the Southeast, where the program had bumped up against those safeguards in the past.”

Whole milk powder was added to the list of products eligible for export assistance, Galen said, to “give us the ability to sell some additional whole milk powder to Mexico,” a major market for it, but was excluded under the old rules. And, the target cheese price under the export assistance program was lowered from $1.40 to $1.30 per pound. The target butter price remains at $1.30.

The boards of the participating cooperatives must now approve the changes, according to Galen. The CWT committee believes that it will maintain the same participation level as seen in the past, Galen said, because “farmers recognize that we need more resources and more resources will be able to help us do more to bring supply and demand back into balance.”

CWT accepted four bids this week from Seattle-based WestFarm Foods to export a total of 620,400 pounds of Cheddar cheese to the Netherlands, Egypt, and Denmark.

Two bids were accepted from Land O’Lakes on 176,000 pounds of Cheddar and 176,000 pounds of Monterey Jack to South Korea and a bid was accepted from California Dairies on 211,200 pounds of European-style butter to Egypt.

The bids raised CWT’s total cheese exports in 2006 to 2.05 million pounds plus 1.26 million pounds of butter.

Meanwhile, dairy product commercial disappearance is another reason for the downturn in product prices, according to market analyst, Jerry Dryer. Dryer reported that sales “tanked” in Fourth Quarter 2005 and he said he has a hard time understanding why.

First Quarter 2005 disappearance for all dairy products was up over 1 percent, he said, and up 2.4 percent in the second quarter, 4.5 percent in the third quarter, but just 1 percent higher in the fourth quarter.

For the year, dairy product commercial disappearance totaled 179.7 billion pounds, up 2.2 percent from 2004. Butter was up just 0.4 percent, American cheese was down 0.2 percent, other cheese was up 3.2 percent, nonfat dry milk was down 4.1 percent, and fluid products were up 0.2 percent.

At the same time, milk production was climbing, Dryer said, “so it is more an issue of too much supply than not enough demand but demand has backed off across the board.”

Dryer said, in butter and cheese, January preliminary data doesn’t look much better. Retail fluid sales also “took a pounding,” he said, and cheese sales “barely eked out an increase.”

When asked if retail prices were affecting this, he said, “there haven’t been any spikes in prices that would have a negative impact but it takes awhile for the lower prices to work through the retail level just as it takes time for the lower milk price to work its way to the farm.”

There are some lags in the system,” he said. “You have to make the cheese and age the cheese before it gets to the supermarket.” The big issue perhaps is the lack of promotion, according to Dryer. Retailers are not doing the kind of promoting that they historically do and when asked what can be done about it, he replied, “give them some stable markets.”

He added that, “for the past two or three years, every time they plan a promotion when cheese is at $1.40, by the time the promotion has kicked into gear, it’s at $1.70 and they get their head handed to them, so they’re a little gunshy right now.”

The dairy markets saw a little strength the week of March 6. Block cheese closed Friday at $1.18 per pound, up 5.75 cents on the week, but 28.75 cents below a year ago. Barrel closed at $1.13, up 2.5 cents on the week, but 31 cents below a year ago. Five cars of block traded hands and two of barrel. The NASS U.S. average block price fell 3.6 cents, to $1.1806. Barrel averaged $1.1498, down 4.7 cents.

Butter gave back most of the previous week’s 6 cent rebound on Monday, a likely reaction to Friday’s Dairy Products report, then inched back a little, but closed Friday at $1.1650, down 5.25 cents on the week, and 39.5 cents below a year ago. Only three cars were sold. NASS butter averaged $1.1783, down 2.6 cents.

The USDA raised its estimate on 2006 milk production in Friday’s World Agricultural Supply and Demand Estimate report due to January output being larger than expected. It now projects 182 billion pounds, up from 181.4 billion.

Commercial dairy use is expected to remain relatively firm, according to the USDA, but the increased production and higher-than-expected beginning stocks will likely result in lower forecast prices and increased commercial ending stocks.

This farm news was published in the March 15, 2006 issue of Farm World.