The dairy outlook presented by the U.S. Department of Agriculture (USDA) as part of its annual Agricultural Outlook Forum in late February contained some dismal forecasts. “This is a challenging time for the dairy sector,” said Dairy Analyst Roger Hoskin of USDA’s Economic Research Service (ERS).

2009 prices lower than 2008
As dairymen are painfully aware, milk prices have dropped substantially. The all-milk price estimate for March 2009 was $11.85 per hundredweight – a steep dip from $21.67 in the third quarter of 2007 price. (A revised all-milk price for March will be released April 9.) The 2008 year price of $18.32 per hundredweight slid from the 2007 price of $19.13 per hundredweight. The 2006 price was $12.88 per hundredweight.

Unfortunately, given the global economic climate, the all-milk price for the year 2009 is expected to be in the price range of $10.95 to $11.65 per hundredweight. The price will bottom in mid-year 2009, then the third and fourth quarters will rebound slightly.

The Class III and Class IV prices will decline from 2008 by $5 to $7 per hundredweight.

Lower feed costs but still low profits
Although more moderate feed costs are anticipated, the lower milk prices are expected to depress the milk-feed ratio into the 1.5 range. If this record low occurs, producers face a discouraging profit outlook for most of the year.

Hoskin noted that although milk prices in 2008 remained relatively high, rising feed prices squeezed profits.

In the second quarter of 2008, corn topped $5.29 a bushel. Decatur soybean meal peaked at $367 a ton during the summer of ’08. The USDA benchmark 16 percent protein mixed ration stood at nearly $10 per hundredweight in the spring and summer before falling below $9 per hundredweight in the fall. These prices pushed the milk-feed price ratio below 2.0.

Cull rates to rise
Even though the number of cows will likely decline to 9.070 million head by the fourth quarter, milk per cow is forecast to rise to 20,500 pounds. Hoskin explained that producers dispense with the least productive cows. In addition, an ample supply of replacement heifers at attractive prices at the beginning of 2009 could boost productivity per unit of feed and overall milk yields. All these factors lead to greater supplies.

Supply-demand imbalance
While steady, domestic demand is expected to be insufficient to absorb added production in the near term. Because of the economic slump, consumers have reduced spending on restaurants and premium dairy products, especially cheese.

Domestic production is expected to slightly decline from 190 billion pounds last year to 188.5 billion pounds in 2009.

But the anticipated drop in exports – from 2.5 billion pounds milk equivalent in 2008 to 1.5 billion pounds in 2009 – further dampens domestic prices.

International demand for U.S. dairy products propelled U.S. domestic prices for milk and dairy products upward in 2007. Exports of cheese, butter and nonfat dry milk rose to record levels in 2008, and the U.S. received a greater market share. Drought in Australia and New Zealand limited their supplies. Strong growth in many Asian countries boosted dairy demand. High oil prices enriched the petroleum-exporting countries, which in turn stimulated more demand for dairy products.

Plus, the value of the dollar declined relative to other currencies. This made U.S. products an attractive buy as the U.S. price was below the world price.

But when oil prices sunk and the global economy deteriorated, the situation changed drastically.

Now, increased competition from the European Union and particularly from New Zealand will make the export market tighter. In addition, Australian production has partially recovered. Because of the global recession, the USDA expects international demand to remain soft compared to 2007 and 2008. Moreover, the dollar’s recent gains will further curtail exports.

Consequently, exports cannot be expected to increase enough to drive up domestic prices.

Weak product prices
Although the outlook forecasts some recovery during the last half of 2009, cheese, butter and nonfat dry milk prices will be near support levels in the first two quarters.

Cheese prices are projected to average $1.18 to $1.25 per pound this year. Butter will average $1.08 to $1.18 per pound.

Hoskin noted that most of the damage has already been done to the prices of nonfat dry milk and whey. For 2009, nonfat dry milk prices are forecast to remain below last year and average 80 to 86 cents per pound. Whey is predicted to be 16 to 19 cents per pound on average.

As the international market weakened and the domestic economy slowed, cheese prices fell from $2 per pound in 2007 to $1.90 per pound in the last quarter of 2008.

Butter prices roller-coastered through 2008, averaging $1.23 per pound in the first quarter before climbing to $1.58 per pound by summer. Export sales figured prominently in this price spike.

Nonfat dry milk prices declined from $1.94 per pound in the fourth quarter of 2007 to average only 90 cents per pound in the same period of 2008. The slowing of exports along with continuing strong production forced some Commodity Credit Corporation (CCC) removals by the end of last year as prices neared the 80 cents per pound support purchase price. Whey fell dramatically to 19 cents per pound in the last quarter of 2008. Since nonfat dry milk and whey are export-sensitive, the international market, coupled with strong domestic supplies, pushed down prices.

CCC actions
Net removals of cheese for 2009 are expected to reach 20 million pounds. Removals of butter are predicted to total 55 million pounds, and nonfat dry milk 575 million pounds. On a fat basis, this amounts to 1.5 billion pounds of milk equivalent and 6.9 billion pounds on a skim-solid basis. Most CCC removals are expected to occur in the last half of this year. These removals will keep commercial stocks from building.

Commercial stocks are expected to end 2009 lower than they began at 9.3 billion pounds on a fat basis and 10.4 billion pounds on a skim-solid basis as later-year production declines tighten supplies.

On a fat basis, total stocks began 2008 marginally above 2007, but lowered as butter stocks dropped. Cheese stocks, which had begun lower, moved above 2007 as production outpaced demand. Nonfat dry milk stocks in 2008 averaged well above 2007 and climbed rapidly in the last quarter of 2008 as exports slowed.

Price recovery depends on the economy and supply/demand
Hoskin concluded that low milk and product prices will prevail during 2009. Exports will drop as the global economy worsens and the U.S. dollar gains value. Feed costs will be lower but remain high, making milk production a losing enterprise for some dairy farms.

Price recovery depends on bringing milk production in line with the lower demand. PD

Dorothy Noble is a freelance author from Hollidaysburg, Pennsylvania.