1999 Production Up

Milk production from January through August was 3.1% more than for the same period a year ago. At the same time, the latest commercial disappearance numbers, January through June, indicate that milk and dairy product sales are not as strong as last year. All milk sales were up just 1.3% with sales of individual products being up 0.5% for butter, only 1.8% for American cheese, 3.7% for other cheese varieties, and 0.8% for fluid milk, but down 11.0% for nonfat dry milk.

The troubling part of these sales numbers is cheese sales, the product that drives farm level milk prices. For the month of July, compared to a year ago, American cheese sales were actually down 5.2% and other cheese sales up only 1.2%. But the increase in milk production has meant more production of manufactured dairy products. Compared to last year, July American cheese production was up 8.2% and all cheese up 5.8%. Accumulated production from January through July, was 6.7% higher for American cheese and 4.9% for total cheese. More milk and declining cheese prices has put more milk into butter and milk powder production. Butter production was up 22.8% for July and 9.1% year to date. July nonfat dry milk production was up 18.5% and year to date up 16.7%.

Milk production during August declined seasonally, but was much stronger that a year ago. For the 20 reporting states, production was 3.6% more than last year. This was a recovery from the 2.4% increase experienced for July. This strong increase was due to excellent milk production per cow, up 3.1%, and a continued building of the nations cow numbers, up 0.4%. The hot weather during the latter part of July still negatively impacted milk per cow in the eastern part of the country. While milk cow numbers were the same as a year ago in Wisconsin, milk per cow was down 1.1% and so was total production. Milk production in Minnesota was about the same as a year ago with 0.9% fewer cows and only 1.1% more per cow. But, this decline in Midwest production was more than offset by exceptional production in the West. Compared to a year ago, August production was up respectively 14.5%, 14.6% and 13.4% for Arizona, California and Idaho. Weather has been ideal in the West for milk production. Milk per cow was up 12.1% for Arizona, 11.0% for California, and 3.5% for Idaho. In addition expansion in cow numbers continues with 2.3% more cows in Arizona, 3.2% in California and 9.5% in Idaho. For August, California produced 672 million more pounds of milk, or more than a fourth more milk than did Wisconsin.

Unfavorable weather did depress milk per cow in both New Mexico and Texas, down respectively 4.4% and 8.3%. But 7.8% more cows in New Mexico still resulted in 2.9% more production, while 0.2% fewer cows in Texas reduced production 8.7%. Despite the severe drought in the Northeast, milk production is still higher than a year ago, and although slowing, production is likely to stay at or above year ago levels. Dairy farmers will cull the herd more closely and feed quality feed. August, compared to a year ago, shows New York production up 3.0% from 0.1% more cows and 2.8% more per cow. Production was unchanged in Pennsylvania with 1.3% fewer milk cows offsetting a similar increase in milk per cow. While milk production is still short of fluid needs in the Southeast, the deficit is declining and less milk is being imported. Florida actually experienced 5.5% more milk than a year ago.

More milk, and more production of manufactured dairy products along with slower sales means a build up in stocks. July 31 stock data show total cheese stocks at 762.5 million pounds, 28% more than a year ago, and butter stocks at 118.9 million pounds, up 133% from a year ago. While NASS correction of under estimated June 30 cheese stocks immediately brought down cheese prices on the CME, the cheese production and sales data explained why cheese prices continue to fall. Milk production will continue strong this fall and on into next year. Cheese and butter supplies will not be tight. Therefore, wholesalers do not need to accumulate inventories to protect their sales commitments and can buy more as they need product. On the CME cash market, 40 pound cheddar blocks were at their peak on August 21 at $1.9725 per pound. As of

September 17, 40 pound blocks fell $1.66 per pound. Cheddar barrels were at their peak of $1.8850 per pound on August 19 and since then have declined to $1.496 per pound. The wide spread of $0.164 per pound between blocks and barrels is putting pressure on barrel manufactures in being able to compete with block manufacturers for milk. Hence, block production will increase relative to barrels and block prices will fall further until the spread narrows to $0.03 to $0.04 per pound.
 

The Final Rule Not Final

Federal order reform is supposed to be completed and go into effect on October 1, 1999. However, the fat lady has not sung yet. Over the past week several law suits have been brought to delay the implementation of the reforms. The Southeast Dairy Farmers Association filed suit last week alleging Federal Order reforms do not fulfill the intent of the 1937 Act that created Federal Milk Marketing Orders. The suit was filed in U.S. District Court in the District of Columbia. A similar suit was filed by Northeast dairy cooperatives and another suit is expected from the Southwest next week.

The Minnesota Milk Producers Association, supported by the states of Minnesota and Wisconsin, filed suit last week, requiring the Secretary of Agriculture to follow through with reforms Oct. 1. This suit was more of a pre-emptive strike. Midwest reform advocates want any lawsuits heard in Washington, not in New England or other parts of the country. If the Final Rule stands, Minnesota producers would stand to gain $10 million annually, estimates the Minnesota Department of Agriculture. That's about $1.50 per cow per month, or $100 per month for the average 65-cow Minnesota dairy farm.

As it stands today, the following federal order provisions will go into effect on October 1:

• 11 federal orders instead of 31.
• Replacing the BFP with multiple component pricing based on product values (this does not apply to Southeastern orders).
• Class III prices (cheese milk) that would have been lower than present($12.05 vs. 12.11 for the first six months of the year).
• Replacing Class III-A prices (butter & powder) with a Class IV, which would have been slightly higher ($12.44 vs. $12.37).
• A new Class I price mover replaces the current BFP. The new mover would have been lower than the BFP ($13.78 vs. 14.02).
• Option 1-B lowers Class I differentials $.29 over the first six months of the year.

There are a number of bills before Congress to change some of the provisions of the revised orders. The House has passed HR 1402. The major provision of this bill are:

• Mandates Option 1A
• Requires formal rulemaking to revise the Class III pricing provisions
• Extends price support program at $9.90 for 1 year
• Authorizes a forward pricing program as a pilot program

In summary, there are many factors that may impact the dairy industry and milk prices over the next few. The August BFP was $15.79, up $2.20 from July. But milk prices will drop for the rest of 1999 and be lower for 2000 as a whole.

If the approved amendments to federal milk orders are allowed to be implemented on October 1, the September BFP will be the last BFP announced. In its place will be an announced Class III price, milk used for cheese. This Class III price will be derived from the component values for milk used for cheese, and thus, like the BFP, will be cheese price driven. So this new Class III price is likely to decline to around $13.40 for October and continue to decline to around $12.50 for December. Just a few weeks ago, there was an opportunity for dairy producers to lock in a base milk price in the $17.00 to $15.00 range through December. Many producers did just that. While prices have since deteriorated, the prices are still not low historically, and therefore, futures contracts and options still offer producers opportunities for price protection.
 

2000 Outlook

For 2000, relatively good milk prices and relatively cheap feed will encourage milk production growth. Production for the year will be up about 2 percent based on a slight decrease in cow numbers and a 2.3 percent increase in production per cow. Major factors adding uncertainty to this forecast are the impacts of federal order reform & dairy compacts. The availability and price of replacement heifers may slow some expansion.

On the demand side retail prices will increase 2 to 3 percent; about the same as all food products and favorable for demand growth. But three consecutive years of more than a 2% growth in commercial disappearance is not likely. Exports will change little. In summary, a 1.8% increase in commercial disappearance.

With supply increasing more than demand, producers should expect lower average prices for the year even with Congressional action on Federal orders. If reform goes through as scheduled, price may be significantly lower. If a new untried pricing system for all classes of milk any price forecast is just a guess.

Florida will continue to do what it has done in the past. If the price is above breakeven, cows will be added and production will increase. However, it is hard for forecast higher prices for 2000. If reform is not reversed, Florida will face lower market prices in spite of higher Class I differential. Prices will be lower due to the loss of cooperative premiums. With the price in Texas falling more than $1.00, premiums will have to fall to maintain a normal price relationship. Expect about a $1.00 decline in Class I prices on top of lower Class III and IV prices. With lower prices expected, production will likely fall.

1. William A. Thomas, Professor and Extension Economist, The University of Georgia College of Agricultural and Environmental Sciences, September 22, 1999.

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