Does the �alignment of the stars� suggest an approaching decline in milk prices?
Dr. E. Bruce Godfrey
USU Extension Dairy Economist
Dairymen have experienced several months of relatively high prices. This has provided funds needed to pay down debt, make needed improvements and catch up on bills. But, as every dairyman knows high prices have generally been followed by a period of low prices. Several factors suggest that milk prices will start to decline in the near future. Some of these are supply-related and some are demand-related.
Several factors suggest that milk production will increase in the coming weeks. First, cow number are up. The number of cows in the 23 highest producing states increased by 21,000 head between March and April. This is the second largest reported increase in cow numbers for this period in 15 years. The largest increase occurred in April 2002, and preceded the decade low price that Utah dairymen received in July 2002. USDA estimates indicate that almost all of this increase in cow numbers occurred in the West with the largest increases occurring in California (6000 head), Idaho (3000 head), Washington (3000 head), New Mexico (2000 head) and Oregon (1000 head). This increase follows a period during which cow numbers declined by about 26,000 head between September 2004 to February 2005, as a result of the cwt program and other variables. The increase in cow numbers is also coupled with rising milk production per cow which has been ongoing for several months. These two factors have resulted in an estimated increased total milk production of 3.1 percent compared to production in 2004. As a result, the �spring flush� period may be especially pronounced this year. All of these factors suggest that the supply of milk will likely increase in the coming months.
One of the key variables that has kept the price of milk at high levels the last few months is the relatively low cheese and butter stocks that have been on hand. While the current stocks are not high by historical standards, the amount is increasing. For example, USDA data indicate that cheese production in the first two months of 2005 was about 22 million pounds greater than it was in 2004, and that butter production was up about 5 million pounds for the comparable period. As a result, American cheese stocks increased by about 26 million pounds in March 2005. This is the largest March increase since 1974, and has resulted in stocks on hand that are nearly equal to the levels that existed in 2003. This is coupled with the largest increase in privately held butter inventories for the month of March in at least 35 years. As a result, increases in cheese or butter inventories may not occur in the future that will continue to provide support for milk prices at the farm level. This coupled with hotter weather and summer vacation for schools suggests that the demand for milk will decline seasonally. The combination of increasing supply and softer demand will likely result in declining milk prices at the farm level in the coming weeks.
It should be noted that current futures market prices indicate that milk prices in the coming months will not decline as much as the above might suggest. The current number of futures contracts does suggest, however, that there is considerable uncertainty in the market because open interest has been increasing for almost all months that contracts are available. Opportunities may exist to �lock in� prices in the short run that may be profitable in the longer run, if the supply and demand relationships noted above begin to reduce the market price of cheese, butter and non-fat dry milk which have a direct impact on the prices paid for milk. If producers in Utah want assistance in evaluating the advantages and disadvantages of doing nothing, buying put options, selling futures contracts or entering into forward contracts with processors, they should contact their local county agent who can arrange for assistance in evaluating these alternative actions. Producers who have used brokers in the past may also want to consult with these professionals. These are not the only actions that may need to be evaluated (e.g., expansion plans, buying heifers or feed, paying debts). If prices begin to decline as expected, dairymen will want to carefully weigh any decision that can affect their �bottom line� if net returns are not as high as they have been the last few months.
For further information contact: Bruce Godfrey at email@example.com or (435) 797-2294.