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Milk capacity concerns building ahead of spring flush

Progressive Dairyman Editor Dave Natzke Published on 22 March 2016

Under ordinary conditions, 1 percent growth in U.S. milk production isn't cause for concern. These aren’t ordinary times, however. Adjusted for Leap Year, USDA’s February milk production report indicated U.S. output was up 1 percent compared to a year ago, noted Mark Stephenson, Director of Dairy Policy Analysis at the University of Wisconsin-Madison, and Bob Cropp, dairy economics professor emeritus, noted in their monthly podcast.

“One percent doesn’t look like much,” Stephenson said. “It’ an ordinary increase in most times, but we have a lot of milk, not just in this country, but sloshing around the world.”

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Milk production is increasing ahead of the spring flush, sprouting concerns supplies will outpace processing capacity from the Northeast into the Midwest, Stephenson and Cropp said.

“I’m wondering about the Northeast,” Cropp said. “They dumped milk last year going into spring. Then you take Wisconsin … and the Upper Midwest, and there’s a lot of milk up here.”

Milk marketers contacted by Progressive Dairyman said excess milk in the Midwest was already being offered at $3 to $5 per hundredweight discounts. There were also reports processors were skimming milk components and dumping excess fluids in the Northeast.

“We aren’t in the flush yet,” Stephenson added.

“We’ve heard about letters going out to producers in the Northeast and Upper Midwest, telling them that may be throttled back on production,” Stephenson said. “Capacity is always one of the ‘squishy numbers. It’s hard to find capacity when you don’t have great markets.”

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With the cheese price is $1.50 per pound, powder is 73 cents per pound, and butter is less than $2 per pound, it’s hard to find capacity, he explained. “If cheese was $2.20 to $2.30 per pound, I’m betting you could find some capacity.”

The situation has Stephenson discussing a “pain” index.

“Clearly, we’ve seen pain in the West,” Stephenson said. “In talking to producers and bankers in the Northeast, I think it’s much worse there than in the Midwest. Premiums have been lower, they have a lot of milk, and they have been paying fees to deal with excess production going into the spring flush. Their basis is much lower than it normally would be.”

Cropp remains somewhat optimistic

Cropp is more optimistic than many market indicators when it comes to prices.

“There’s a lot of pessimism in this market,” Cropp said. USDA’s projected 2016 average Class III price is in the $13.60-$14.20 per hundredweight range. The Class III futures market doesn’t hit $14.00 per hundredweight until August.

“I’m still more optimistic than that,” Cropp said. “I could see exports pick up a little, and production slowing.”

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He projects a $14.00 per hundredweight Class III price in May, rising into the $15s in the third quarter, with a glimpse of $16 per hundredweight possible by September or October. His Class III average for the year stands at about $15.00/cwt.

“It depends a lot on what milk production does the rest of this year,” Cropp said. “Even if these higher prices materialize, it will be a tough year for dairy.”

Global factors also come into play. U.S. milk powder exports are one bright spot, with January sales a record high. 

Dairy financial pain in New Zealand and Australia may result in some retraction in milk production there. Production gains in the European Union, however, will continue to hamper any price recovery.  PD

Find the full podcast at the Program on Dairy Markets and Policy website.

Read Cropp’s March Dairy Situation and Outlook report. (PDF, 244KB)

Dave Natzke
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